MAY 15, 2020

By Professor (Dr)  Anoop Swarup

INDEED, any stimulus by a nation in these pandemic times raises tremendous debate as also the concerns. The economic travails would nominally refer to attempts at use of monetary or fiscal policy to stimulate the economic revival that may in many an instance border on the survival of the populace. Most of the Federal Reserve's do ease the interest rates followed by quantitative easing so as to increase the money or credit. Colloquially 'priming the pump' as has been the case across the world, now facing the bitter pill of economic recession when demand has suddenly vanished and production coupled with employment are no longer sustainable.

To sustain livelihoods and improve demand would also imply a fiscal stimulus such as increasing public consumption through transfers and even lowering taxes. The side effect is a public debt burden in order to increase the rate of growth. Such an approach is considered to be particularly Keynesian on the assumption that the stimulus will cause economic growth due to the multiplier effect in the economy. Typically and of course, Keynesians are pro stimulus, in contrast to rational economists against it, and the mainstream economists take the middle path.

It was Milton Friedman who felt that the Great Depression almost a century back was accelerated as the central bank did not counter the sudden shock in time through a monetary stimulus to improve money supply and its velocity. More recently, a decade back during the subprime crisis Ben Bernanke had argued that the issue was actually lack of credit, not money supply, and therefore, the Federal Reserve pumped in more credit, to prime the pump instead of adding more liquidity as a stimulus. This was for revival indeed and not really for survival, considering the state of the Banks who were the real culprits in the first place. Yes the economy was back on track in next few years because of the aggressive and well directed policies. However, in India it is as much a question of survival particularly when it comes to the millions of the daily wage earners and the masses driven to destitution and who are even below the poverty line. Let us therefore have a more holistic approach. In this context, It was Jeff Hummel who developed an academic insight into the different implications of the two conflicting approaches. Also I may cite Jeffrey Lacker, who with Renee Haltom, criticized Bernanke's approach because "it had encouraged excessive risk-taking which had in the past contributed to financial instability." Thomas Humphrey and Richard Timberlake had a more critical point of view in their book "Gold, the Real Bills Doctrine, and the Fed: Sources of Monetary Disorder 1922-1938" on the real bills doctrine as the causative factor in the Great Depression.

It is often argued that fiscal stimulus typically increases inflation, and hence must be counteracted by a typical central bank. Hence only monetary stimulus could work. Counter-arguments say that if the output gap is high enough, the risk of inflation is low, or that in depressions, inflation is too low but central banks are not able to achieve the required inflation rate without fiscal stimulus by the government. Let us in this context also agree as to why monetary stimulus is perhaps more neutral as decreasing interest rates do tend to make new investments more profitable. The fiscal stimulus where the government driven by the popular mandate takes over the investment decisions more due to populism, may also lead to corrupt practices. In a country as ours a lot depends on the very nature of the decision making process, when the government of the day, would in all probability also take forward its vision as such to include new roads, ports, airports or the railways to benefit the industrialization process as also the public at large who cannot pay for them, to choose investments driven by long term benefits that are more beneficial however not profitable in short term. Here is a lesson for India and provides a pragmatic way forward

The stimulus in India may act as a magic wand only if delivered with wisdom and sincerity. Spread over a year or two years timeframe to stress, most critically on self dependence atma nirbharta, swarajya and swadeshi where the focus of the government is on labour, land, liquidity and law. An inherently positive approach that may even attract the 500 million plus revenue multinationals from China. These enterprises will not only enrich India with cutting edge technology employ our entrepreneurial youth for a much sought after demographic dividend. The real but bitter truth has been that our vast work force remains in the unorganized sector and abysmally unregulated and unprotected more so, due to the inflexible and myopic policies and at times existing unrealistic labour laws of the past. The economic stimulus is a bold mix of revival and survival to a new deal beginning now and a passage to reforms that broadly announces a departure from the extant mindset of indecisiveness.

India gets into the league of nations internationally at number four, with as much as 10% of the GDP stimulus, when Prime Minister Narendra Modi announced the Rs. 20tn economic package. No doubt it included the measures already taken by the Reserve Bank and government. The government had earlier announced a Rs. 1.7tn stimulus package (0.8% of GDP) to support the bottom of the pyramid in March.  This was followed by an announcement by the central bank of Rs 8tn or 4% of GDP that includes liquidity support measures amounting to around Rs. 6.5tn or 3.2% of GDP (includes CRR and MSF cuts). To add to that, the Reserve Bank had also announced a Rs. 500bn liquidity support for mutual funds, TLTRO 2.0 of Rs. 500bn and Rs. 500bn of liquidity support to NHB, SIDBI and NABARD.

The Finance Minister Nirmala Sitharaman further elaborated the much needed support to the MSME sector on the 13th of May that may well be surmised as the 6 major steps,

1. Collateral Free Automatic Loan to MSME. No guarantee required. Period 4 Years. No principal repayment for 1 year.

2. Stressed MSME: Subordinate Debt 20,000 crore

3. MSME doing viable business: 50,000 cr. equity infusion for expansion

4. Definition of MSME changed:

a. Micro: Limit revised upward Investment upto 1 cr. or Turnover upto 5 cr.

b. Small: Limit revised upward Investment up to 10 cr. or Turnover upto 50 cr.

c. Medium: Limit revised upward Investment upto 20 cr. or Turnover upto 100 cr.

d. No difference in manufacturing and service sector for Micro Enterprises

5. Government Tenders: Global tenders will be disallowed upto 200 cr.

6. E market linkage for MSME. Within next 45 days all payments will be made to MSME.

Other major infusions include,

a) On the EPF front contribution for June, July and August will be paid by Government (72,22,000 employees will be benefitted). Total Rs. 2500 benefit cr.

b) EPF: Statutory PF deposit limit reduced from 12% to 10% for next 3 months. (6,750 cr.) (except CG and PSU's)

c) NBFC, HFC & MFI; Rs. 30,000 cr. Special liquidity scheme

d) Partial credit guarantee scheme for NBFC: Rs. 45,000 cr scheme. Govt. of India will be guarantor. 20% will be borne by GOI.

e) Discom: Liquidity crisis. Rs. 90,000 cr. infused for improving Liquidity crises. This amount will be paid by PFC and REC.

f) Contractors: Extension upto 6 months to comply with contract conditions.

g) Real Estate: Covid-19, an event of 'Force Majeure'. Registration and Completion extended for 6 months for all projects expiring o or after 25.03.2020

h) Direct tax relief for tax payers:

- TDS rates reduced by 25% of existing rates from tomorrow to 31.03.2021(Non salaried to residents and TCS) Payment for - VSVS extending upto 31.12.2020 - pay without any additional amount.

- Pending refunds of charitable trusts, non-corporate business, proprietorship, partnership, LLP and society will be issued immediately.

- Due dates of IT return for FY 2019-20 (earlier 31.07.2020 and 31.10.2020 is now 30.11.2020)

Tax Audit due date: Earlier 30.09.2020 is now 31.10.2020

- Date of assessment is also now extended,

From those getting barred on 30.09.2020 to 31.12.2020

From those barred on 31.12.2021 to 30.09.2021

In India the incremental measures had earlier amounted to just over Rs.10 tn (5% of GDP) to include the support from the Reserve Bank in form of loan guarantees, to amplify the stimulus while keeping the cash outflow contained.

In a second booster dose as euphemistically mentioned on 14th May in tranche 2 the focus on tribals, small farmers, MNREGA support to returning migrants, small vendors numbering 50 lakhs and to cap it all a booster of 70,000 crores to 2.5 lakh middle class families so as to spur job creation has been emphatic. Three boosters for migrants numbering 8 crores include free grains for 2 months, provision for eco vaccine and a provision for right to minimum floor wage. A rental-housing scheme for urban poor is a welcome introduction through the PPP mode. The Finance Minister clarifies that the 'One Nation, One Ration Card' will work on a digitized platform that will enable both the migrant worker and the laborer and their family to acquire ration wherever they are. She also highlighted that a hike in minimum daily wages from Rs 182 to Rs 202 has been introduced. To benefit around 3 crores farmers, mostly small and marginal farmers, she announced Rs 30,000 crores additional emergency working capital funding through NABARD and a Rs 2 lakh crores concessional credit extended to boost 2.5 crore farmers through the Kisan credit cards.

As expected, criticism of the opposition as expected that the stimulus is nothing but a headline with a blank page or that there is nothing for the migrant labourers or that such a stimulus is not at all a fiscal stimulus but is only a liquidity infusion or even a deferred loan or that even the 25% percent TDS reduction does not bring down the tax liability as there is no profitability therefore no liability now in the first place or the EPF withdrawals of about 60000 crores as they were one's own savings, in any case . Some have even pointed out that this stimulus would tantamount to accounting jugglery or even voodoo economics, perhaps driven only by realpolitik as was once underlined by the German writer Ludwig von Rochau and not by any scientific wisdom. In the backdrop of the COVID-19 outbreak and the subsequent nationwide lockdown, the Confederation of Indian Industries (CII) expects that India's economy will grow from a contraction of 0.9% to a growth of 1.5%, in the current financial year. But let us not forget that the equity benchmark, Sensex surged over 483 points spurred by the stimulus, tracking gains in IT and banking stocks as expectations did enthuse investor sentiment.

Nonetheless, it will do well for the Finance Minister and her team to take all round criticism into account to ensure that the reforms process continues in the best interest of our federal polity so well followed by the Prime Minister and the Chief Ministers thus far. Setting such an example in this time of crisis will do well not only for the country but to the looming future of the poorest of the poor as also an example for democracies across the world. The five pillars to support the Atma Nirbhar Bharat or Swarajya initiative not in a narrow sense but as a broad based approach, being criticized by some economists as mooted by Prime Minister Modi, listed a growing new economy, creating a state-of-the-art infrastructure, setting up a technology-based delivery system, leveraging the young demography and exploiting domestic demand are indeed laudable in principle.

Indeed such an initiative with the right mindset, bureaucratic honesty and political sincerity will surely deliver to put India on the right course to leapfrog to a developed roadmap for all time to come and prove to be both for revival and survival in these times. We may also see incremental reform measures from the states also, in our federal polity that will help improve competitiveness to bolster these reforms and catapult India on the high road to progress and convert the pandemic challenge into an opportunity. To me, this is a never before chance, on the back of the 4th largest economic stimulus, for India's economic revival concomitant to the survival of the poorest as perhaps the only path to future positive in our country.

[The author is Founding Vice Chancellor Jagran Lakecity University and Chairman, Global Knowledge Alliance Melbourne, Australia. The views expressed are strictly personal.]

References:

1. "Investopedia Stock Simulator". Investopedia. 15 September 2019. Retrieved 15 September 2019 

2. "Investopedia Academy Launches to Empower Consumers with Financial Skills". Prnewswire.com. Prnewswire. September 19, 2017.

3. "Economic Stimulus".  Investopedia .

4. ^   "Pump Priming". Investopedia .

5. ^   Jeffrey Rogers Hummel (October 15, 2010). "BEN BERNANKE VERSUS MILTON FRIEDMAN: The Federal Reserve's Emergence as the U.S. Economy's Central Planner" (PDF).

6. ^   Renee Haltom and Jeff rey M. Lacker (July 2014). "Should the Fed Do Emergency Lending?" (PDF). Federal Reserve Bank of Richmond.

7. ^   Bernanke v. Friedman, professor Alex Tabarrok, July 15, 2014.

8. ^ Humphrey, Thomas M.; Timberlake, Richard H. (2019). Gold, the Real Bills Doctrine, and the Fed : sources of monetary disorder 1922-1938. Washington, D.C.: Cato Institute. ISBN   978-1-948647-12-0 .

9. ^   Horwitz, Steven (29 September 2011). "Herbert Hoover: Father of the New Deal" (PDF). Cato Institute. p. 5. Hoover and his secretary of the treasury, Andrew Mellon (himself often wrongly portrayed as a defender of laissez faire), proposed 0 million in new federal buildings as well as USD 175 million in public works through the federal Shipping Board. These proposals met with approval from the professoriate as examples of 'constructive industrial statesmanship.' They were also ridiculed as 'pump priming' in a New York Tribune editorial cartoon of April 8, 1930...

10. ^   Mead, Walter Russel (April 1998). "Signs of the Times: Deflation Ahead" . Mother Jones .

11. ^ "Why stimulus matters". www.cnn.com. Retrieved 25 March 2020.

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