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Economy needs big boost in liquidity to revive

NewsEconomy needs big boost in liquidity to revive

New Delhi: Since March 2020, the nation has been reeling under a double blow, such as it has never before experienced since 1947. It is a tribute to the medical system under the leadership of the Union Health Minister, backed by the Prime Minister, that despite a debilitated economy, India managed to contain the death rate to less than 3.5% of coronavirus positive cases, and to have a recovery rate of over 47% of the cases reported.

On the one hand, there was the continuation of the economic tailspin that began in FY2016. By the time the coronavirus arrived here in February this year, the economic system of India had been seriously ailing for the last four years.

This had caused a sharp decline in the economy. The annual growth rate of GDP [in constant prices] declined annually from almost 8.0% in FY2015 to 3.2% in FY 2020. It is estimated that it will be -6.5% in FY2021. This decline has been reflected in every sector of the economy i.e., in agriculture, industry, and services.

Since the end of February 2020, the onset in India of an imported pandemic called coronavirus in its latest species (viz., Covid-19, discovered internationally from Wuhan based research fiasco in November 2019) has piled upon this tailspin, caused by the aforesaid clueless economic policy of the Ministry of Finance and the RBI.

Now since 15 May this year, the third danger is the fresh border conflict against the Chinese army in Aksai Chin, compounded by China’s increasingly close ally, Nepal, demanding a piece of India in Uttarakhand. These challenges before India have become “a triple whack”.

As far as the coronavirus pandemic is concerned, the Narendra Modi government has handled the situation well and decisively. The mortality figure is below 6,500, which is very low compared to the US figure of nearly 100,000.

The coronavirus pandemic’s significant figure is the number of deaths due to the virus. In a democracy like ours, this number is not easy to underestimate since culturally no Indian desires to hide the fact of a death in the family; and so socially a death becomes known to friends and acquaintances even if media censorship were to be clamped on the country.

In comparison to other G-20 countries including developed countries, the coronavirus casualty numbers in India, is presently quite low.

In a nation-wide television broadcast, the Prime Minister has proposed a new plan based on what he termed as a strategy for Atmanirbhar Bharat (self-dependent India).

The Prime Minister further had announced that an ambitious mobilization of 10% of the 2019-20 [or FY2020] GDP, i.e., about Rs 20 lakh crore, would be provided as stimulus to kick start the economic growth process.

To enable this kick start at this stage, a large genuine stimulus [not liquidity easing in terms of credit etc.], is a priority. Unfortunately, stimulus is being confused with liquidity.

The stimulus we require is direct financing for the affected. That is what we actually need today: because such a stimulus is not only a dignity-saver for the poor and the deprived, but it is also the “demand generators” sorely needed today for the economy to recover and resume fast growth and generate employment.

The coronavirus is a cruel leveller. Once it enters the body of a human, there is a huge uphill task to save the human. But yet we have to go for it without discrimination between rich and poor and not plead helplessness or hide behind blaming the poor for not having IDs and credit cards (as MoF officials have done).

So if a family of five is seen walking distraught on the road with their miserable luggage on their heads, then they must be a migrant labourer with his family walking back to his village. We don’t need fancy IDs to recognize who they are and what is their miserable state. Fortunately, since my last published criticism in The Sunday Guardian [24 May 2020], the government has taken a number of steps including even, when necessary, flying out these hapless persons.

If a poor and/or salary dependent middle class family gets Rs 2,000 per member in cash, their spending of this will become a part of the demand stimulus for kirana shops and dhabas; and such a  family will survive  with hope restored.

Even in the rich country that the United States is, President Donald Trump has disregarded the liberals’ tear jerking and pontification, and has made sure that billions of dollars are transferred through bank accounts on direct transfers into the middle class personal accounts. As a consequence, no amount of calumny piled on President Trump by left wing liberals or hostile media can now dent his core support, which is about 40% of the electorate.

On the other hand, credit guarantees and collateral waivers (such as the Ministry of Finance proposes) are supply enhancers. Except for MSMEs, the corporate economy does not need direct stimuli—since if a buyer is there, then it is enough to provide credit guarantees and collateral waivers.

Of course the hospitality sector—airlines and tourism infrastructure—is being slammed by the Centreal government. The raising of airline fuel price by multiples at this juncture (at a time when worldwide the crude oil prices have crashed), is just insane, as Professor Madhav Nalapat has argued in these columns.

By the time the government manages to end the coronavirus pandemic, the economy may become so emaciated that there may be a situation of mass unrest due to acute unemployment and poverty.

Let us recognize the bottom line today for policymaking: India today is the only G-20 country which is not just afflicted with a deadly virus pandemic raging among its citizens, but is also long debilitated by falling growth rates in essential goods and services production, which is now accompanied by sharply rising unemployment and evaporating purchasing power. Let us not forget that the election campaign of Narendra Modi was “Vikas”, not Hindutva. (We, outside the government, have taken care of the plank of Hindutva).

Thus, two decades later in 2024, the government must not allow the attractive slogan of “Vikas” to go the way of “India Shining” of 2004. India should not be allowed to go from drowning in the deep sea of bankruptcy to being hijacked by the Devil waiting in the wings. Vikas cannot be subsumed under the new slogan of Atmanirbhar Bharat.

Regrettably thus, the Prime Minster has been let down by the Finance Ministry once again [remember demonetisation and GST?] since he did not specifically delegate the formulation and implementation of the stimulus package to experienced politicians in his Cabinet [i.e., those who can win a Lok Sabha election]—much as he has done in containing coronavirus Pandemic through a properly delegated team headed by an experienced Minister.

That is, the PM here too should have delegated his entire stimuli package at 80% of the Rs 20.90 lakh crore (and not 1.05% as presently planned stimulus), to experienced politicians in his Cabinet, with a base amongst the people.

Lal Bahadur Shastri did just that to bring about the “green revolution” by entrusting the task to Gulzarilal Nanda, Morarji Desai, and C. Subramaniam, along with a technical Swadeshi team of Dr M.S. Swaminathan and others. P.V. Narasimha Rao also followed the same approach.

The problem for the nation, today is not that we cannot hope to defeat the coronavirus, and also expect to revive the economy, but that (since there was already a decelerating economy post 2015), the economy would be shattered further by the lockdown. According to estimates available, in FY2021 [i.e., 2020-21] the GDP growth rate could decline sharply to negative growth rates in FY 2021. Moody’s, a past crony smiled at by the Finance Ministry for its ultra favourable forecasts, has done a U-turn now and predicted a -6.5% growth rate in GDP for FY21. Others too, such as SBI and Goldman Sachs, are estimating sharply declining negative growth rates.

Therefore, post the coronavirus pandemic, the economy needs experienced and expert handling by the team effort of senior Ministers of the Cabinet and not be left to a novice aided by a bunch of bureaucrats.

We may win the coronavirus battle, and yet be badly defeated in the war to save the economy from turning turtle because of large-scale starvation. Extreme social disorder is bound to ensue then.

We therefore now need to set our sights clearly on steering the economy forward and avoiding the potholes ahead.

Moreover now is not when we should sell dreams about a Ram Rajya in India in 2024. Today is when we should think about how to wipe the tears of those rendered destitute and empower the forces of demand.

The Rs 20.9 trillion package relies heavily on bank credit to push business revival and has already met with a lot of scepticism. But small businesses are heavily leveraged, and will find it hard to borrow more money from banks, despite government “guarantee”. Therefore, government’s efforts to revive small businesses require more innovative measures. Companies are clamouring for tax reliefs instead of more credit facility. It is my opinion that during the remainder of this financial year, for any hope of revival, the government must enthuse with proper incentives the manufacturing sector. In FY2021, services would be the hardest hit because they depend the most on close social interaction and informal labour supply. Barring healthcare and public administration, most services may be afflicted this FY2021.

As stated above, India’s economy grew at a paltry 3.1% in the quarter ended March 2020—the lowest in 44 quarters. The $5 trillion target set in June last year for 2024, was impossible to achieve even then during the pre-coronavirus pandemic era. But today it is a wild hope. Ironically, agriculture and public spending are the only “green shoots” of the economy of FY21, showing a declining but still rate of growth. There are more trends which are alarming: NPAs of banks will, by end of FY21, rise to 11.6% of total loans against Basel norms of 2%; GVA in agriculture will be 2.5% growth rate in FY21, down from 4% in FY20 [average growth rate for agriculture for the past six years has been 3.2% per year]; MSMEs collectively have estimated that to save their business the employment provided will be reduced by 70%.

The lessons for this financial year are thus clear. Let us learn from the recent past of hesitant economic policy and dare for the future with wisdom. Empowered leaders should have access to frank sage advice so that they can delegate tasks to those proven able.

Dr Subramanian Swamy is an MP nominated by the President for his eminence as an economist. He is a former Union Cabinet Minister for Commerce and Law.


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