Everyone wants a good stimulus

By, Srivatsa Krishna is an IAS officer. Views are personal

Introduction

While pleading for less or no government, corporate India wants to always privatise profits and socialise losses. So, when Jet Airways crumbles, or a Yes Bank implodes (for reasons other than business risk), everyone goes running to the government seeking bailouts.

Now, it is natural that with a legitimate contraction in economic activity due to the COVID-19 pandemic (and deep uncertainty), which is an endogenous shock, everyone wants a good stimulus.

The Reserve Bank of India can print notes, no questions asked, but this is not without serious consequences and the trade-offs need to be understood

Supply-side shutdown

1. One cannot ‘stimulate’ an economy during a supply-side lockdown and there are ‘announcement effects’ — both good and bad — that go with the stimulus.

It is like trying to jump-start a dead engine when you also have a flat tyre! So, any ‘good stimulus’ can only come into effect post lockdown and extensive consultations are on with everyone for that.

2. Second, everyone, when talking about the stimulus, conveniently forgets that government revenues too will be seriously hit. This will be anywhere from 2-3% of GDP (given that the disinvestment target itself is 1% of GDP and the realisation is likely to be close to zero in the current financial year).

So, the effective fiscal deficit is going to be somewhere around 7.5 % (if you take into account all the off-balance sheet borrowings). So, while everyone is talking about how the U.S. government has set aside $2 trillion for bailouts or 9% of its GDP, no one is ready to face the trade-off that India’s starting point is going to be at around 7.5% of GDP fiscal deficit (net of savings due to both, cuts and deferred expenditure.

On top of this is all the ‘merit expenditure’ on health and direct income support to the poor.

3. It may be worthwhile to bear in mind that from 1947 to 1997, the Central government always routinely monetised its deficit, without leading to high rates of inflation, much less hyperinflation.

The Fiscal Responsibility and Budget Management (FRBM) limits are hardly a grand success and routinely all governments have broken the barrier. Other countries with huge debt-to-GDP ratios like Japan (>200%) and the U.S. (125%) get away with barely a rap on the knuckles but India is pulled up for minor slippages on a 70% debt-GDP ratio.

4. Third, some prominent commentators have argued extremely fallaciously, that bailouts should be based on need and not affordability.

5. Thus, another mantra being espoused is that bank managers should be incentivised to lend and the government should indemnify (compensate) loans given during this period.

This could well lead to bogus companies springing up overnight to grab the stimulus in collusion with banks.

It remains to be seen what fiscal support tools the government will use can ensure that credit flows to various sectors. The government owes about ? 1 lakh crore on tax refunds and also had promised to make up for any difference to the States if the GST did not grow by 14% per annum.

Way ahead- Giving grants to States

This is the time for it to transfer this to the States as a grant, for one year, to offset the revenue loss to States

Lifting the lockdown will be the first step towards a good stimulus and one does need to un-handcuff a billion people to save their lives too.