JAIPUR – Prime Minister Narendra Modi’s Indian government has unveiled a US$85 billion package to jump-start the economy after a second Covid wave.
The package, announced on June 26, is worth about 3% of gross domestic product (GDP) and includes $14 billion in loan guarantees and concessional credit for pandemic-hit sectors like tourism and building healthcare infrastructure.
The credits and guarantees are scheduled to last until March 2022. A free food grains scheme for the poor worth $12.7 billion is also included in the wider relieve package. The first stimulus package, worth $265 billion, was disbursed from May last year.
Finance Minister Nirmala Sitharaman said the new package aims to speed up growth, boost exports and create jobs. But economists and analysts are already asking if its enough to spur the economy?
Some analysts say the package looks more like a liquidity stimulus than the fiscal stimulus that is needed. Except for free visas for the first half-million tourists who visit India up to March next year, nothing else in the package appears particularly stimulatory.
Financial support has also been announced for registered tourist guides and travel and tourism stakeholders. Even so, industry groups have already expressed displeasure as they wanted more financial support and tax rebates.
India’s GDP contracted 7.3% in 2020-2021, a record fall. The respected Centre for Monitoring of Indian Economy says unemployment was about 9.5% as of June 28, comprised of 10.8% in urban areas and 9% in rural regions.
Many people are reporting salary cuts, consumer confidence is low and leading economists say some industries are churning at only about 50-55% of their capacity.
This, analysts and critics say, is mainly due to a lack of demand as Indians tighten their belts for potentially more tough times ahead. They say the government should have looked to put money directly into people’s hands, mainly the poor and middle class.
Supriya Shrinate, a spokesperson for the opposition Indian National Congress said, “In a country where 230 million people have slipped below the poverty line, 10 million jobs have been lost and 97% of the people are poorer than before, I wonder who is going to take loans.
“Consumption will boost investments which in turn will create more jobs. The government will have to put more money in the hands of people, especially the poor and middle class,” Shrinate said.
The Modi government seems instead overly focused on the supply side by trying to increase investment through incentives in an economic landscape devoid of demand.
Another question is whether a financial institution or bank will provide credit to a business which is losing money or in debt for various reasons, a lack of demand being one of them.
Former finance minister and senior Congress leader P. Chidambaram recently tweeted, “Demand will not grow in an economy where jobs have been lost and incomes/wages have been reduced. The answer to this crisis is to put money in the hands of the people.”
As desperate times call for desperate measures, the Modi government may be able to overlook rising fiscal deficits and inflation for the time being.
Another measure could be to boost capital expenditure infrastructure spending. Infrastructure development in India is largely controlled by governments, both state and national. Resources dedicated to building would give jobs to thousands if not millions of desperate people.
Another step would be to restore the dearness allowance (DA), an increase in line with inflation for payments to government employees, public sector employees and pensioners. State and national governments ended the allowance last year.
Giving more to people in rural areas through the Mahatma Gandhi Employment Guarantee Act 2005 (MGNREGA) could also work wonders. MGNREGA is a social security measure that aims to guarantee the “right to work” for certain hours.
A couple of days before the stimulus package was unveiled, the leading daily Economic Times reported that India’s top CEOs had called for a large fiscal stimulus or tax incentives from the government to revive the economy but their demands were ignored.
That’s raising questions among economists and industrialists about whether the Modi government is taking the country’s economic decline seriously. They say the people surrounding Modi are more interested in politics and winning elections than alleviating people’s pandemic-caused suffering.
Some leading economists have revised this fiscal year’s growth forecasts to 7.5-8% from 10-11%, both figures based on last year’s disastrous low base. But judging by the government’s latest stimulus package, chances are that it will be even lower.
Anil Sharma is a Jaipur-based veteran journalist and political analyst. He tweets at @anilsharma45