Fiscal Freezing and Liquidity Diffusion Interplay: A Damage in the Long run?

A Snapshot of the Package

Tranches in the Relief Package

N

ow we will have a closer look towards major policies and reforms announced through these different tranches in the Covid Relief Package announced by the Government of India in reltion with the Project of Atmanirbhar Bharat Abhiyan.

1. Provision of collateral free automatic loans worth ₹3 Lakh crore to MSME with 4-year tenure and 100% guarantee.
2. Change in the definition of MSME by extending the investment limit from 25 lakhs to 1 crore and in addition including a criterion of turnover up to 5 crores for micro industries. 
3. Replacement of trade fairs with e-market facilities given the unprecedented situation.
4. EPF relief for all establishments with ₹2500 crore liquidity support.
5. Special liquidity scheme amounting ₹30000 crores for NBFC’s, HFC’s, MFI’s etc.…
6. One-time emergency liquidity infusion of ₹90,000 crores for Discoms.
7. Registration and Completion data could be extended up to six months for Real estate sector. 
8. Reduction of TDS rate by 25%.

1. Extension of Agri-loans moratorium to 31st May.
2. Employment assurance through MGNREGA for migrant workers.
3. Rural infrastructure support by raising the working capital limit to ₹67,000 crores for agriculture produce procurement.
4. ₹11,000 crores for urban poor (migrant laborers) for setting up shelters.
5. Incentivizing manufacturing and industries to build affordable housing units.
6. Special credit facility of ₹5000 crores for 50 lakh street vendors.
7. 70,000 crores boost for housing sector Credit Link Subsidy Scheme for Middle income group and extension of CLSS scheme up to March 2021.
8. Focus on employment for Adivasis for forestry related works and provision of ₹6000 crore CAMPA fund.
9. Additional access to institutional credit for marginalized and small farmers.

1. New scheme for interest subvention of 2% per annum for dairy co-operatives.
2. ₹1 lakh crore agriculture infra fund for strengthening of farm gate infrastructure.
3. A cluster-based approach with which local value-added products can actually reach global markets.
4. ₹20,000 crore fund to be created for development of marine and inland fisheries.
5. Animal husbandry infrastructure development fund of ₹15,000 crores.
6. Under Top to Total Yojana, Operation Green will be extended to other perishable items other than tomato and potatoes.
7. Inter-state trade would be facilitated by providing barrier free selling of the produce across states and thereby ensure fair and reasonable prices.

1. Commercial Coal mining will be introduced based on a revenue- sharing mechanism.
2. Private sector investment in coal sector through auctioning.
3. FDI limit in defence manufacturing has been hiked to 74% from 49%.
4. Removal of restrictions of private sector on utilisation of the Indian Airspace.
5. Six more airports will be up for auction under the PPP model.
6. Privatisation of power distribution companies in Union Territories in line with the tariff policy.
7. Provision of ₹8100 crores in the form of Viability Gap Funding (VGP) for creation of social infrastructure projects.
8. Private sector will be permitted to use the ISRO facilities and other relevant assets to improve their capacities.
9. Technology development cum incubation centres will be initiated for the nuclear system by linking with start-ups.

1. Borrowing limit of states hiked to 5%.
2. Additional Rs 40,000 crore allocation for MGNREGA. 
3. Indian public companies can list their securities directly in permissible foreign jurisdictions.
4. National Digital Health Mission blue print will be prepared.
5. Private companies which list Non-Convertible Debentures on stock exchanges will not be regarded as listed companies.
6. Technology-driven education to be the focus: PM eVIDYA - a programme for multi-mode access to digital/online education to be launched immediately.
7. Minimum threshold to initiate insolvency proceedings raised to Rs 1 crore from the earlier Rs 1 lakhs.
8. In strategic sectors, at least one enterprise will remain in the public sector but private sector will also be allowed.

Analysis

The global economy is already slipping into a recessionary effect and particularly the health of Indian economy is in more critical phase. Since the problem is a twin sided (both demand and supply) one, the policy and revival strategy is to be necessarily shaped in such a way so that at least for the time being there could be hope for improvement from this unprecedented situation. The economic policy followed by the right wing National Democratic Alliance (NDA) government has always thought of beyond the political economy of Communism-Capitalism, and necessarily stressing more on Free-Market economy. As this issue is mainly a reverberation of supply shock with a simultaneous presence of subdued demand and production slowdown, that even persisted before the outbreak of the pandemic. The policies of the fiscal authority even then to solve the above-mentioned demand side problem was criticized for its superfluous spotlight on supply side measures.

While looking into the so-called comprehensive fiscal stimulus package announced by the Government of India, which is about 10% of the nation’s GDP seems to be more futuristic in nature rather than to concentrate on the present situations in a more realistic way. The packages announced by most of the countries including India mainly concentrated on two aspects of policy framework. That is one through the fiscal impulses and the second one is through liquidity provisions. When it comes to the reality in order to solve the problem there is a balanced need of the two dogmas. The package gave more stress to liquidity provisions when compared to the fiscal stimulus that is required to make the engine of the vehicle functioning. That is for the ‘V’ shaped recovery [1] , there is a need of at least 5% of fiscal impulses whereas it is estimated between 1 to 2% only in the package announced. It clearly shows us that still the policies are mostly formulated fundamentally on supply side keeping demand side untouched or slightly envisaged. Even though there were a lot number of policies, allocations, provisions and reforms measures announced, the effective result of these measures is still uncertain as most of them are only liquidity creating measures which would help in cash and credit transferring but would be more beneficial in long-run as now a larger section is facing the problem of deficiency of demand. There arises the need of fiscal stimulus policy which could necessarily raise the aggregate demand in the economy more directly than a liquidity diffusion strategy. This is also not the time for any government to think more on keeping the fiscal deficit under control as doing so would create the situation more into a worse picture. A direct benefit transfer of a minimum of ₹3000 to ₹5000 per households and provisions for raising the supply levels of food grains and necessity items through the PDS (Public Distribution System), strengthening of NFSA (National Food Security Act) etc. are the measures to be taken immediately. Deficit financing with the aid from the monetary authority is also vital as the demand pressure is inflating. In general, the package is a set of one-sided solution strategy to a twin-sided problem. Concentrating only on the liquidity diffusion could not lead to a satisfactory result as it can sometimes aggravate the current situation which is also of a deficiency in aggregate demand. So the provision of medicine to the economy from one side may not be effective in either short run or in long run.  

Moreover it is not clear that what is the real financial pressure that put forward the government to privatize the Defense Manufacturing sector and Space Science Facilities, which forms the pride and prosperity of the nation. The policies such as technology-driven education, additional Rs 40,000 crore allocation for MGNREGA, additional access to institutional credit for marginalized and small farmers, Inter-state trade facilitation in agriculture marketing etc. are some of the steps which would receives unconditional support from the citizens of the country. But the real question is the existence and survival of those who are completely and ruthlessly affected by the pandemic.

In simple words, the answer to those who doubts, what is wrong with the policies taken till now could at least understand the basic sense put forward by the economist Keynes as ‘In the long run we are all dead’. There lies the paradox that emerge from this as, what is the need of a policy which couldn’t answer the present crisis rather looking into an uncertain future ahead? Given the announcements, at least there is a high need for quick implementation of public expenditure policies and those measures which could stimulate the demand in the economy.

---

Footnote

^{[1] A V-shaped recovery is characterized by a sharp economic decline followed by a quick and sustained recovery. A V-shaped recovery is different from an L-shaped recovery, in which the economy stays in a slump for a prolonged period of time.↩}

Bibliography

1. Press Information Bureau, Government of India
2. Money Control
3. Fiscal Monitor - April 2020, International Monetary Fund (IMF)