On the 12th of May, the prime minister of India, Mr. Narendra Modi, announced the “Aatma Nirbhar Package” allegedly allotting a total of Rs. 20 Lakh Crore specifically for helping the economy out of its slowdown. Though the prime minister left the detailed announcement of the package in the hands of our financial minister, he did focus his entire 20 minute speech on staying self sufficient as a country. Among Japan’s package of approximately 21% of its GDP, and the USA’s package of 13% [of its GDP], the aatma nirbhar package is allegedly offering around 10% of its GDP in stimulating the economy.
A majority of this stimulus, focuses mainly on liquidation measures in order to help out farmers, the rural economy, middle income groups, as well as small businesses and street vendors. While it is promised that a direct provision of food, strengthening of wage laws and protection of labourers, are a part of the package, most of the money will reach the people of the country, indirectly (through liquidity), which brings about the question as to whether the package announced is really worth the 20 lakh crore that it has sold itself to be.
Unlike the $2 trillion package the united states has injected into their economy, entirely made up of measures that are to directly impact the people of it’s country, this package, as mentioned before will do both, therefore concluding that an expenditure of 20 lakh crore will not be entirely from the fiscal budget. The RBI in the months of February, March, and April, had announced an additional liquidity worth of about 8 lakh crore, which has found its way into the package, along with the 1.7 lakh core “Prime minister’s gareeb kalyaan package” that was also announced by the financial minister last month. Considering the government and the central bank are two separate entities, it can be questioned as to why some measures even needed to be included into the official package.
The stimulus is a cumulation of loan guarantees, with the largest proportion (of 3 lakh crores) being for small businesses with turnovers of no more than Rs. 100 crores. By giving a complete credit guarantee on such loans, neither the businesses, nor the central bank will face a loss as they will indefinitely get paid back. At face value this is quite a good measure in a slowing economy. However, the drawback to this would be that the government isn’t exactly paying anything from their budget immediately. This is because the money that is failed to be payed back by small businesses will be spread out over the span of 4 years, with a temporary prohibition of these loans lasting 12 months. Also, not only is it likely that with a guarantee, businesses would rather not pay the loan back at all and thereby create a moral hazard, but businesses have little to no incentive to borrow in such uncertain market conditions either. At the end, the government only pays back those loans that have been defaulted, a small percentage as compared to what they’ve oh so loudly announced will be offered.
A reduction of 2%, from the pre Covid mandate of 12% in statutory provident fund contributions will also come into effect. This reduction of 2% from both employees and employers is expected to cash in liquidity aid of almost 7000 corers. During this process, the cut in the fund will increase the disposable income of the common white collared worker for the next couple of months. As tax saving investments decrease, the proportion of income tax will essentially increase as people enter each tax bracket. In hindsight, this would only mean that people’s money is coming back to them, along with the disadvantage of increased taxes and lost interest. Having been a measure included in the economic package, the government spends a mere 2,500 crores in the stimulation, to bring more disposable income at the hands of the common man. Similarly, a rate cut by 25% was made to the tax deducted as well as collected at source. The aim of the lower TDS rate aims to increase people’s income at hand, a measure once again to increase aggregate demand. However, this will not reduce, but rather defer an individual’s tax liability, as they will eventually have to pay the tax at the applicable rate, depending on their income. However, what is the government’s contribution to this process? Rate cuts will be facilitated by the RBI, while the government does not spend money in this area of the package either, but rather hands back the people what is already their money.
Aside from the larger proportion of liquidating measures, the stimulus also includes direct provisions of money. And though a large amount, with such a vast and populous country, is it enough to support the workers it is intended to help? 8 crore migrant workers without a ration card are said to benefit from Rs. 3,500 crore over the course of 2 months. This would be about Rs. 400 per worker. According to former union finance minister, P Chidambaram, the Rs.1000 crore for migrant workers offered by the PM cares fund, will be given to state governments to cover the expenses of travel, accommodations, medicine and food for these workers rather than immediately in their hands. On the other hand, even if the money were to be divided and directly given to each worker, it would amount to a total of Rs.150 per worker.
According to calculations done by Barclays, The official government expenditure from the budget Nirmala Sitharaman, the finance minister announced, will amount to Rs. 66,500 crore, only a 0.34% of India’s GDP. A substantial drop from what was oversold at 10% of the GDP and brought amongst the largest economic stimulation packages in the world currently. Given the not so strong financial position of the country before the spread of the pandemic and the lockdowns, when banks that had the money to lend but were not willing to do so to rescue smaller firms, and fiscal deficit widened by 2.4% of its GDP, it makes sense as to why the government emphasised more on liquidation measures, with little importance given to money handed directly to the people of the country. However, Devesh Kapur and Arvind Subramanian, experts among many in this area, explore on the ways it would be most optimal for the government to go about their policies and decision making such that the citizens of this country are to benefit the most and simultaneously bring the economy up. Both suggest traditional quantitative easing, and though controversial, but slightly more effective, bringing helicopter money into action as well. Borrowing from foreign entities and printing new money may have its own drawbacks of high inflation and excessive borrowing rates, but analysed, these would be better monetary policies If employed along with maintaining credit flows, depressurising interest rates and carefully planned government expenditure, as well as increased lock downs in certain sectors. Whether or not the government can afford to spend a lot of money, they will have to face the expenditure of about Rs. 10 lakh crore, as per expert calculations, which is essentially why creativity in the path they choose in order to do so would be imperative.
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