A well-balanced fiscal stimulus package
Cognisant of its constraints and compulsions, the government of India has adopted a twin mantra for shaping its stimulus package, rolled out in five phases plus one earlier phase.
Objective of the fiscal package-
- The first strand has been to first ensure that the human cost of the COVID-19 crisis is minimised, especially for those at the bottom of the pyramid.
- The second has been to convert this crisis into an opportunity by implementing bold structural reforms, which have been pending for a while.
Demand-supply mismatch –
- It is widely recognised that the present crisis has seriously impacted both the supply and demand side of the economy. The stimulus package effectively addresses both these aspects.
- Several measures have been announced to lift the sagging demand in the economy. It is important to point out that total effective demand is made up of demand for consumption, investment and intermediate goods. This has to be taken note of by those who consider only the cash in hand of consumers as the sole means for reversing the declining demand in the economy.
- Therefore, additional credit lines provided to micro, small and medium enterprises (MSMEs) or to street vendors or to farmers (additional credit of ₹2 trillion) will also surely contribute to the strengthening of aggregate demand in the economy.
How consumption will be boosted?
Measures announced for ramping up consumption demand directly included –
- ₹1.73 lakh crore for improving the incomes and welfare of the most vulnerable, including the 20 crore female Jan Dhan account holders who will receive monies directly into their bank accounts (announced in the first package);
- ₹50,000 crore additional incomes in the hands of those whose TDS and TCS were reduced by 25%;
- ₹40,000 crore additional allocation for MNREGA which will provide jobs and succour to those returning to their villages from metros and cities;
- ₹30,000 crore for construction workers;
- ₹17,800 crore transferred to 12 crore farmers; and
- ₹13,000 crore transferred to States to finance the costs of running quarantine homes and shelters for migrant workers.
These measures will trigger demand, which is of course the necessary condition for triggering recovery in economic activity.
Addressing supply-side constraints –
- The first was to ensure that the nation’s food security as also farmers’ incomes were not impaired. The government declared agriculture and all related activities as essential services immediately upon announcing the lockdown. This permitted the successful harvesting and efficient procurement of the critical Rabi crop. Procurement operations pumped in ₹78,000 crore as new purchasing power in the hands of the farmers.
- The second was to prevent the pressing cash/liquidity crunch from converting to insolvencies and bankruptcies. A moratorium was announced for all businesses for their debt servicing obligations to commercial banks. MSMEs were given an additional credit line of ₹3 trillion without any fresh collateral to further reinforce their access to credit. MSMEs could also avail of new equity from the ₹50,000 crore fund of funds.
- Benefit – These measures provided some succour to a large number of businesses, especially those in the services sectors like hospitality, entertainment, retail etc. which have suffered a near complete loss of revenues during the lockdown.
- Power DISCOMS – A whopping ₹90,000 crore credit package has been extended to state electricity utilities to enable them to clear their dues to private sector power producers.
‘Aatmnirbharata’ – Self-reliance quotient –
- The third set of measures were directed to significantly improve the ecosystem for private producers and investors, both in agriculture and manufacturing.
- Farmers now have the much-needed freedom to choose their clients. Freed from the age-old tyranny of the Essential Commodities Act, 1955, traders and exporters of agro-products can maintain necessary stocks to meet export obligations.
- With further liberalisation in the defence production sector, India will achieve higher self-reliance in this strategic sector and also emerge as an exporter.
- Private businesses can now operate in sectors hitherto monopolised or dominated by the public sector enterprises.
- Finally, in a measure that touches the lives and livelihoods of more than 50 lakh families, street vendors all over the country have been given a credit of ₹10,000 each for re-stocking.
Thus, ‘the package’ has guaranteed the survival of existing production capacities and laid strong grounds for attracting fresh investment to bolster growth.
Source – The Hindu
QUESTION – Analyse the fiscal stimulus package announced by the Union Finance Ministry in response to the COVID19 crisis. How will it handle the demand-supply mismatch, boost investments and restart consumption whilst ensuring self-reliance in the entire process.