The Atma Nirbhar Package announced by the Union Government might be insufficient to deal with the economic impacts of the COVID19 pandemic. The package does little to create a demand stimulus and misses out on initiating policies for economic reconstruction.
The COVID19 outbreak and the containment measures to deal with it have led to a massive disruption of economic activities. The Union Government’s economic response to the pandemic has been through two major packages. The first one – Pradhan Mantri Garib Kalyan Yojana – was announced on March 26th and is primarily focussed on providing economic relief. The second one – Atma Nirbhar Package – was announced by the Finance Minister in mid-May. The Union Government says that this special economic and comprehensive package is aimed at making India self-reliant – “Atmanirbhar Bharat”. It claims that the total size of India’s economic response is almost 10% of India’s GDP – 20 lakh crores.
What are the key components of India’s economic response?
The Pradhan Mantri Garib Kalyan Yojana is a Rs. 1.7 lac crore economic relief package for the poor. It includes Rs. 50 Lacs insurance cover for health workers, free food grains supply to 80 crore poor people for 3 months, direct cash transfers to the most vulnerable, MNREGA wages hikes by 11%, etc. The Atmanirbhar Bharat package consists of relief and credit support measures for businesses (specifically MSMEs), short term and long term measures for supporting the poor and measures to strengthen agriculture, fisheries, and food processing sectors. It also recommends structural reforms in sectors like coal mining, defence production, atomic energy, etc.
What are some key takeaways?
India’s containment measures to deal with the pandemic have been amongst the strongest in the World and have led to a massive slowdown of economic activity. India’s large informal sector makes its labour force particularly vulnerable. Given the extent of economic shock experienced by those most vulnerable, the economic relief measures seem meagre. The ongoing migrant labourers crisis seems to be a manifestation of this.
For the revival of the economy, support has been promised to businesses especially the MSMEs. Rs 3 lakh crore Emergency Working Capital Facility for businesses, Rs 20,000 crore Subordinate Debt for stressed MSMEs, Rs 50,000 crores equity infusion from MSME fund of funds are some of the major steps in this direction. Given the cash crunch faced by businesses due to reduced economic activity, liquidity support is crucial. This liquidity support will help businesses fulfill their contractual obligations and pay wages to labourers. A large part of the present package is in the form of liquidity support (8% of GDP) through credit support or credit guarantee schemes. The real cash flow is minimal.
The Union Government claims that the size of the economic response is 10% of India’s GDP – 20 Lac crores. This claim seems to be inflated. As mentioned above a large chunk of this response is in the form of credit (eventually it needs to be repaid to the banks). Also, some of the monetary support is subjected to certain conditions (Total Rs. 50000 crore equity infusion in MSME is possible if private players pitch in 40000 crores). Some of the schemes in the Atma Nirbhar package had been announced before. (e.g. Pradhan Mantri Matsya Sampada Yojana)
Some of the relief measures announced for the poor might not benefit them immediately. One of the major reasons for the exodus of migrant labourers from cities has been the lack of affordable housing facilities. Labourers found it difficult to pay rents as factories shut down and construction work stopped. The government has announced a scheme for affordable rental housing complexes. But the details have not been chalked out. Apart from shelter, migrant workers found it difficult to access food grains. The government has announced 100% national portability of ration cards by March 2021. If the scheme materializes, it will help the most vulnerable in case of new waves of infections. Thus the effect of some of these schemes will not be seen immediately but in the medium to long term.
The Government has announced structural reforms across 8 sectors of the economy – e.g. introduction of commercial mining in the coal sector, enhancement of private investments in the minerals sector, increasing FDI limits in defence manufacturing, removal of restrictions of the utilisation of India’s air space, boosting private sector participation in space activities, privatisation of power distribution facilities. These reforms can unleash the potential of these sectors by attracting private investments, ensuring sectoral growth, creating employment opportunities. The definition of MSMEs has also been changed to include turnover as a criterion. This will provide a better picture of the status of these MSMEs and help design appropriate policy interventions. Also, the artificial classification of service and manufacturing MSMEs has been removed. Some reforms have been suggested in agriculture – deregulation by amendments to essential commodities act, agricultural marketing reforms to provide more marketing choices to farmers. The announcement of these measures suggests acknowledgment by the government of the problems/challenges faced by these sectors. It must be noted that some of these reforms have been announced before but not much has fructified.
What was missed out?
The economic response to the pandemic should consist of measures for immediate relief, economic revival, and economic reconstruction. The packages announced by the Government till now have to some extent provisions related to immediate relief and revival. The economic reconstruction bit which should include macroeconomic policies to create conditions for growth and employment is largely lacking. Without an appropriate demand stimulus, the economy will not be back to the growth trajectory. One of the ways economic reconstruction can be carried out is by massively investing in infrastructure – building new state capitals, education towns(e.g. Pilani), medical towns(e.g. Manipal), etc.
The extent of demand and supply shocks on different sectors in the economy varies. Thus the policy interventions have to be sector-specific. Some sectors like tourism, hospitality, aviation are the worst hit. The tourism and the hospitality sector employ 87.5 million people and contribute more than 5% to India’s GDP. But the economic package announced by the government did not have any specific interventions for these sectors.
At present we are faced with a health emergency. To deal with the present pandemic and the possible new waves of infection, India needs to invest heavily in its public health expenditure. Public spending on health in India is anyway low. The present packages mention that public expenditure on health will be increased but do not specify the amount of increase. Public health expenditure should have been given more importance. Ironically, the announcements related to the National Animal Disease Control Programme have more details.
Thus, the economic response to the crisis seems insufficient to deal with the impacts of the COVID19 pandemic. The package should have consisted of measures for immediate relief, economic revival, and reconstruction.
(With key inputs from Anupam Manur)