The COVID-19 fiscal response and India’s standing

The COVID-19 fiscal response and India’s standing

Context:

- The article analyzes the COVID-19 fiscal response in other developing countries and evaluates India’s fiscal response.

- The article utilizes data from the International Monetary Fund Policy Tracker, the COVID-19 Economic Stimulus Index (CESI) of Ceyhun Elgin at Columbia University, and the World Bank to understand the COVID-19 fiscal response of different countries.

Fiscal response in developing countries:

Cash transfers:

- Cash transfers constitute the largest category of support provided by the governments of developing countries. This has been the prominent demand-side intervention in developing countries.

- Of the World Bank’s list of 621 measures across 173 countries, half were cash-based.

- The World Bank reports that, on average, such transfers amount to 30% of monthly GDP per capita, reaching 46% for lower-middle-income countries, for an average of three months.

- Countries have also significantly expanded coverage of their cash transfer programmes from pre-COVID-19 levels.

- Countries like Bangladesh and Indonesia have increased the number of beneficiaries. Indonesia’s cash schemes now cover almost 60% of the population. Indonesia has created two new unconditional cash schemes to reach 20 million individuals in urban and rural settings excluded from the current social protection measures.

Other measures:

- Other significant measures related to food assistance (23%) or waiver/postponement of financial obligations (25%).

- Only 2% related to public works, a clear indication of the popularity of cash transfers over public works for income support, perhaps in part due to concerns over physical distancing.

- Countries like Mexico and Indonesia have enlarged their employment schemes and allocated higher resources to fund public works schemes.

Financing:

- Developing countries are resorting to drastic means to finance COVID-19 responses like the amendment of legal budget limits and the enhanced issuance of bonds — including a ‘pandemic bond’ by Indonesia.

- Central banks in many emerging economies are experimenting with purchases of public and private bonds in the secondary market (quantitative easing) or directly purchasing government bonds on the primary market (monetising the deficit).

Fiscal response in India:

- The Atmanirbhar Bharat package has been the major fiscal response in India. The total Atmanirbhar package is billed at 10% of GDP.

- The central government had also initially announced a Rs. 1.7 lakh crore relief package – Pradhan Mantri Garib Kalyan Yojana in response to the COVID-19 pandemic and countrywide lockdown, providing free food and cash transfers to support the poorest and most vulnerable citizens during the crisis.

- A significant demand-side intervention in the Atmanirbhar Bharat package was ?40,000 crore of additional outlay for the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA).

- The government has also extended issuance of free rations under the Public Distribution System.

Financing:

- The Reserve Bank of India has been buying sovereign bonds in the secondary market.

- There is debate on whether the Indian government should invoke the “escape clause” in the Fiscal Responsibility and Budget Management (FRBM) Act, to enable the central bank to directly finance the deficit.

Concerns:

Insufficient measures:

- The article argues that the relief measures do not seem to be commensurate with the economic disruption caused by the lockdown.

- India had one of the most stringent containment measures in place. The extent of relief measures announced does not seem to be commensurate with the economic disruption and dislocation caused by the severity of the lockdown.

- Vietnam, Indonesia, Pakistan, and Egypt, all while averaging less stringent measures than those in India, have announced stimulus measures that are as large or more substantial, as a share of GDP.

- Before the announcement of the Atmanirbhar Bharat package, India lagged significantly in terms of fiscal response, as compared to developing countries that are similar in GDP per capita, state capacity, and structure of the labour force. As of early July, the gap seems to have narrowed.

Unclear numbers:

- Given the blurring of the distinction between fiscal and monetary components in the Indian measures, ensuring accurate figures for fiscal responses is a challenge.

- The Atmanirbhar package is billed at 10% of GDP. The headline number for India’s fiscal response in international databases is around 4% of GDP. But, the article claims that the current fiscal response including all the major announcements of the government would only add to 1.7% of GDP.

Window dressing of measures:

- The article notes that most demand-side measures announced by the government involved frontloading, consolidation, or rerouting of existing funds and don’t add to the effective fiscal intervention by the government.

- For example, the recently announced ?50,000 crore Garib Kalyan Rojgar Abhiyan, consolidates projects of 12 ministries/departments and does not have any additional allocations.

Wrong policy measure:

- In India, one reason for the subdued fiscal response and the resort to monetary measures is likely a concern with the debt-to-GDP ratio, which is higher than for most countries in our set.

- However, aggregate demand and confidence in the economy have slumped and may not recover for many months. Not spending more now might only worsen the debt-to-GDP ratio if growth remains depressed.

Way forward:

- Demand-side interventions announced by other developing countries could provide lessons for additional measures in India.

- Additional fiscal outlay — in the form of cash and in-kind transfers and expanded public works schemes — would save lives and jobs today and might prevent a protracted slowdown.

- India could consider expanding existing transfer programmes or even creating new ones.

- India could consider expanding entitlements in its flagship MGNREGA programme as well as introduce an urban version of the programme.