20 lakh crore package: Stimulus or frivolous?
Instead of waiving off existing loans or a promise to bear the interest rate by the government, an offer for more loans is not something that would improve the condition of farmers
'Atmanirbhar Bharat Abhiyan', the stimulus package inundated by number of zeros announced by the Prime Minister, was for sure very impressive at the first sight. However, only when the Finance Minister started breaking it down to details, its efficiency and implication became questionable. The announcement of an inevitable stimulus package was welcomed with applause, but as the Finance Minister went into, it ended in nothing but disappointment for a pandemic-hit economy, posing some intriguing questions. When the government is arranging and rearranging the old policy measures, it failed to address the elephant in the room. As the first tranche of the stimulus package, she listed a number of measures for MSMEs (Micro Small Medium Enterprises), which included setting up a collateral-free automatic loan provision worth Rs 3 lakh crore. To provide the stressed MSMEs with equity support, the government will also facilitate the provision of Rs 20,000 crore as subordinate debt and Rs 50,000 crore equity infusion. The government also took the opportunity to change the definition of MSMEs in the country to help the micro sector.
The first tranche addressed MSMEs, which contributes around 45 percent of the GDP of our country. However, the real concern is whether it is marching in the right direction or not. Such a boost might have been useful if it was announced even before an emergency emerged as there was already a shortage of credit (Economic Survey report 2019). Supply will not necessarily create demand and it might create further problems if the produce of these 45 lakh MSMEs in India has no buyers. Study conducted by Azim Premji University shows that eight out of ten of the urban employees are going to lose jobs and the informal sector including migrant laborers are pushed into poverty which means that the purchasing power of the economy will reduce, there will be no demand in the economy. If there are no proper measures to create effective demand in the economy, the stimulus package for MSMEs will become another disaster that might end up needing even more disaster recovery packages.
Therefore, the allocated fund would not transcend into stimulating the economy. Rather working capital assistance or an immediate cash transfer to MSMEs as they struggle to pay salaries to the employees could have worked wonders on the economy. 99 percent of the existing MSME loans are from the micro sector, and there is no mention about those existing loans in the package. It would have been an effective decision to waive off those loans which would add to Rs 4.62 lakh crore rather than encouraging them to take more loans when there are obvious future uncertainties. Increasing loan packages for an economy that currently has a liquidity preference, that is, most people choose to hold money rather than spend it, is dead-end policy. It would have been beneficial if the government promised a waive-off at least twelve months of interest rate on their existing loans, as it would be a considerable relief in the future and in the long run it would also create the rural demand and boost employment.
According to the second tranche, which also seemed like a progressive policy measure is a repetition of the previous disappointment. The package includes eight crore migrants, who are not covered under the food distribution system, will be given 5 Kg of grains per person and one kg chana per family for two months. Well, it is too meagre to be even called a crisis plan. According to studies by Scholars Meghana Mungikar, Jean Drèze, and Reetika Khera, whose work revolved around issues of food security and poverty for decades, already 108.4 million people that are 8 percent of the population are excluded from the PDS which is universal entitlement. Only around 60 percent is covered by NFSA (National Food Security Act) where 67 percent is the mandate.
Therefore, the stimulus package that is said to expand the coverage of NFSA would merely make it to the existing mandate. Another one is a 14.62 crore person-days of work generated under MGNREGA which the government added a package that promised 300 crore person days of employment in villages in the fifth tranche. A little research to check the reality would prove that this would not create much impact as the data shows that last year 265.35 crore person days were generated and an average of only 48.9 days of employment were provided. The current package is a very small percentage increase of the target to be achieved in already existing problems in MGNREGA, where more people were rendered jobless. This would not benefit a huge population who have lost their jobs and migrated to rural areas. The government is not clear about how this is going to work as well.
Same is the case with Kisan Credit cards. That is one more reason why direct cash transfer is inevitable in an emergency. Again, loans for the middle class are another blind alley as they too are stuck in a liquidity trap with the obvious future uncertainties. Same is the case with agriculture loans. Instead of waiving off existing loans or a promise to bear the interest rate by the government, an offer for more loans is not something that would improve the condition of farmers. Only direct benefit transfers would improve the condition of agriculture now.
Thus, if you rearrange or add insignificant changes to existing packages like PMAY, CAMPA, NFSA, MGNREGA, it would not be a stimulus package. This stimulus package is not designed as a crisis package, rather it is merely an extension of already existing packages which is far from improving the economy to escape from the clutches of crisis. What is surprising is that, at the time of the fight against the global pandemic, the government is still not talking about the public expenditure on health, which should be the priority than liquidity infusion in the economy when we do not have enough medical equipment.
The migrants who are still on the path to go back to their homes, might not return any soon. With a direct cash transfer, the ruralisation of MSMEs will benefit lots of migrant workers who are skilled but stuck in their villages. Beginning with an income guarantee scheme, it could further act as an employment guarantee. Similarly, in urban areas, it should promise the same pattern, fist cash transfers, and then employment guarantee.
Direct benefit transfer in a creative way is the way forward. Sustainability can only be created through such policies when priority is given to public health, meeting basic needs, and improving demand in the economy. Fiscal federalism would create better policy impacts, so it is important to make funds available for States. Interest for a moratorium should be borne by the government, as subsidising the interest would only not create much burden in the future. Decentralization, monetization, and financial inclusion can save the country from this crisis.
(Jadhav Chakradhar is Assistant Professor at the Centre for Economic and Social Studies (CESS), Hyderabad. Medha A S is research scholar at CESS. Views expressed are personal)