Fiscal Package In The Wake Of Covid-19: Looking For More
The financing of the expansionary policy needed at this juncture may require monetising the deficit, writes M Govinda Rao.
The Covid-19 pandemic has created a global crisis and disruption to the Indian economy that is unprecedented. In fact, the magnitude of the crisis is yet to fully unfold and even the first few days of the lockdown have resulted in a serious sense of uncertainty and insecurity among the people. The economy has not seen such a crisis in recent memory, even the global financial crisis of 2008-09 pales into insignificance in terms of its impact on the life and livelihoods of common people, even as it is yet to unfold fully.
The lockdown declared by the Prime Minister, necessary as it is to contain the outbreak, will have a severe economic impact – both in the short term and in the medium and long term. The adverse impact will be particularly severe on the unorganised and vulnerable sections of society. In fact, some of the state governments were quick to take initiatives in announcing succour to the beleaguered sections and Thursday’s announcement by the Union Finance Minister has not come a day sooner.
Legacy Of Under-Spending On Health
The most important intervention needed at the present juncture is to ramp up the capacity to save lives through affordable testing facilities, hospital beds, medicines and medical personal. A lot of effort is made in this direction and like most other things, we seem to act only when a crisis hits. We neglected healthcare throughout, and our outlays have all-along been abysmal, amounting to just 1.2 percent of GDP when the actual should have been more than 3 percent. Our focus on public health has been poor and healthcare infrastructure is grossly inadequate, despite several committees making recommendations, the most recent being the 2011-12 High-Powered Committee on Universalising Healthcare appointed by the Planning Commission, that had Dr. Srinath Reddy as the chairman, and this author as a member.
The focus of Ayushman Bharat—which was unveiled with so much fanfare—has been to increase insurance cover and not building infrastructure, in terms of wellness centres in rural and urban areas and strengthening district and state-level hospital infrastructure.
The crisis has brought home the fact that building public health infrastructure is an absolute necessity to protect the lives of the people.
PM Garib Kalyan Yojana: Doing The Math
Almost 36 hours after the lockdown was announced by the Prime Minister, Finance Minister Nirmala Sitharaman rolled out the Pradhan Mantri Garib Kalyan Yojana with eight different elements to address the needs of different sections of the vulnerable. The package announced is important and would help to provide immediate relief to the vulnerable. The distribution of foodgrain and pulses for three months is important and will provide food security to those who have ration cards and this is estimated to cost Rs 45,000 crore. Additional expenditure on account of higher MGNREGA wages is estimated at Rs 5,600 crore. The outlay on ex-gratia payments for women, old, and disabled is estimated at Rs 34,000 crore and for free cylinders, Rs 13,000 crore.
The Need To Do More
Given the gravity of the situation and in the prevailing uncertain environment about the livelihoods of the large majority of the people in the unorganised workforce, the measures announced do not seem to be adequate. Even in this, the PM Kisan payment has already been budgeted and the announcement merely frontloads the payments.
There are no additional expenditures involved in relaxing the norms for borrowing from own provident fund accounts, asking the states to use the deposits of the construction workers’ welfare fund or increasing the limit of collateral-free loans to the women’s self-help groups. Of course, the distribution of foodgrains involves cost, but it is from the prevailing stocks and does not come from the Consolidated Fund of India.
The measures unveiled by the Ministry of Finance will need to be substantially augmented to provide a reasonable level of livelihood security to tide over the difficulties arising from the crisis.
Hopefully, this is only the beginning and there will be more to follow depending upon the duration of the crisis and magnitude of the problem.
The regulatory forbearance, liquidity support, and lowering the cost of borrowing initiated by the Reserve Bank of India could help the small and medium enterprises. Much more needs to be done to alleviate the sufferings resulting from the loss of incomes for unorganised sector employees. They are likely to lose employment and incomes not only during the period of the lockdown, but also after. The announcement by the government should be taken an important first step and as an assurance, that vulnerable sections will be protected in this crisis period.
Financing This Emergency Spending
The gravity of this crisis requires much larger intervention than in previous times. Unlike the global financial crisis, the situation today comes on the back of a slowing economy. In response, the government will have to postpone its fiscal consolidation and loosen its purse strings – first to augment public healthcare infrastructure and facility requirements, second to ensure livelihoods, and then to undertake the recovery.
Considering that the household sector’s financial savings are less than 7 percent of GDP, the financing of the expansionary policy may require monetising the deficit.
This presents potential threats in the medium term and, therefore, calibrating the policies in terms of magnitude and types of interventions and their sequencing becomes extremely important. These are the times when the state capacity comes into question.
M Govinda Rao was a member of the Fourteenth Finance Commission and former Director of NIPFP. Views are personal.
The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.
