By DM Deshpande
At any other time a bailout package of Rs 1.7 lakh crores translating to 0.8 per cent of GDP would have been hailed as huge, well, by Indian standards. But not now, when the spread and toll Covid 19 has taken worldwide. Worse, no one knows how much more pain is in store as we look at every passing day with dread and fear.
Even the subsequent announcement by RBI of monetary easing to the tune of 3.2 per cent of GDP was not enough to enthuse the stakeholders. Some of the top economists have called for bolder measures. Even a known conservative Rangarajan, former Governor RBI has said that monetization of deficit is alright now. We can think of consequences later, may be next year. Others too have called for tripling the size of the package plan. And if that does not work, increase it five-fold, is the suggestion being given.
In order to decide whether or not our economic package is adequate, US announcement of US $ 2.2 trillion seems to be the benchmark which at 10 per cent of GDP is the mother of all economic packages. Just to put this in perspective, even a bailout package of US $20 trillion in India does not seem to be excessive with this yardstick of measurement.
Clearly, it is a wrong bench mark for any other nation, more so for India. We are a country of over 1.3 billion people, economy in tatters even before the virus came and have 93 per cent jobs in informal sector.
US dollar is the undisputed number one currency in the world. No other currency is used as extensively as this in international trade. It has the tag of a safe haven for investment that no other currency can boost of. US multinational companies operate in most parts of the world including in extraction of crude oil in the middle east. As such it can print currency not just for the US but for rest of the world too without worrying about it’s impact on inflation on home front.
On the contrary, world economy and western countries in particular are staring at a recession induced by Covid 19. Some predictions are that this would be worse than the Great Depression of the 1930’s.
The US also has a track record of setting the house in order after the crisis is over. In the aftermath of global financial crisis of 2008, huge amounts were given as bailouts and loans. Some of them were recovered as quickly as less than year others later in course of time. All the amounts lent as a part of TARP (Troubled Assets Relief Plan) have been recovered in the US. That does not happen in India.
In fact quite the contrary, fiscal and monetary concessions given during crisis too will not be revised because of people’s resistance and fear of losing votes.
While there is certainly a case for hiking the package we need to draw a line somewhere. Shortly, the Government has promised to come out with a second bail out announcement. There seems to be some consensus to hike the present outlay under bailout to a total of around Rs 5 to 6 trillion. It will still be around 2.5 per cent of the GDP.
This is big money. If not spent wisely it will create more problems in the days to come. First priority ought to be to increase the direct cash transfer to at least Rs 1,000 and also make it Universal Basic Income. Second, medium and small firms need urgent liquidity infusion just to stay afloat. With all this it is still possible to set aside Rs one trillion which ought to be spent judiciously on health and education, two areas where we are underinvested.
Just going on printing currency, which is what deficit financing is all about is something India can ill afford. How to finance this deficit needs some hard thinking and planning. A lot of unproductive expenditure is incurred by the government. Since there are glorious uncertainties of Covid 19, we may, God forbid, discover that spending Rs 5 trillion was not good enough to get out of the rut. Then we may have to look at other options to reign in revenue.
One, government could tap black money which by all accounts has not reduced, DeMo notwithstanding. No questions asked amnesty scheme like in the past may be designed to shore up funds. Second Covid 19Bonds could be issued with appropriate coupon rate and long term maturity. Multiple bonds with varying maturity periods could be issued; in fact, they can also be used to bring back black money held here in India as well as abroad.
Black money is not just a moral issue. It is a reality that has manifest mainly because we have not found a solution to high cost of elections. In addition, perverse incentives given in the past and rampant corruption have made it attractive to evade rather than pay tax honestly. Lastly, privatization-both partial and full-can fetch handsome returns to the Government. Even the argument of ‘selling the family silver’ may not hold water since these are extra ordinary times!
The author has four decades of experience in higher education teaching and research. He is the former first vice chancellor of ISBM University, Chhattisgarh.