There is every reason to believe that the fall out of this
pandemic would be much deeper in the global economy as compared to Financial
Crisis of 2008 and in case, the International Monetary Fund’s (IMF) estimation
of global economy shrinking by 3% during 2020 turns out to be true; this period
would mark the steepest downturn since the ‘Great Depression’ of 1930s.
Great Depression
started with a stock market crash in United States of America and it soon had
almost the entire world in its clutches. In mid crisis period, John Maynard
Keynes published his book titled “General Theory of Employment, Interest and Money”
in the year 1936. Later Keynes came to be known as the father of ‘Macroeconomics’
since he was the one to provide the solution to the crisis which eventually worked.
Present crisis situation is unique in the sense that we are
not only witnessing a massive demand shock but also a supply shock due to
disruption of supply chains across the world. In the present situation, the
policy makers have to be cautions while adopting expansionary fiscal policy as
“too much of money” in the economy may lead to rise in prices in a situation
where supply is not forthcoming.
The Keynesian prescription of expansionary fiscal policy by
government interventions is still seeming to be the only way to prevent
countries from sliding into depression, as
the economic activity comes to a screeching halt; owing to the widespread
lockdown policies being adopted by countries to delay the spread of corona
virus.
Depending upon the anticipated rate of damage and
unemployment figures, countries in the world have announced relief measures as
stimulus packages ranging from 11 percent of GDP in U.S.A, 16 percent in
Malaysia, 5 % in Germany ,3 % in Canada and in Japan, a staggering USD 1.1 trillion
which comes out to be more than 20 percent of it’s GDP. On same lines, Hon. PM
Modi also announced during his address to the nation on 12th May
2020, that Indian government would put together special financial relief
measure worth 20 lakh crore –approximately 10 percent of India’s GDP.
These economic stimulus packages being announced by countries
including India are a slew of monetary and fiscal policy measures like direct
benefit transfers, unemployment benefits, aid for ‘gig’ economy workers, support
for the worst affected industries like airlines, loan moratoriums for farmers,
Micro, Medium and Small Scale Industries (MSMEs), medical insurance for
frontline corona warriors etc.
The details of the 20 lakh crore package in India were
announced by the Finance Minister over a period of five days and the break up
was as under:
1.92 lakh crore –PM Garib Kalyan Yojana announced earlier.
8.01 lakh crore – RBI’s monetary measures
Tranche 1 Policy Measures – 5.94 lakh crore
Tranche 2- 3.01 lakh crore
Tranche 3- 1.50 lakh crore.
Tranche 4 & 5 – 48,100 crore.
The announcements made comprised of some landmark reform measures
along with infrastructural spends, increased public expenditure on health,
education and privatisation of strategic Public sector undertakings. Some of
the reform measures like opening of all sectors to private sector; had long
been asked for from the government.
Just as during the crisis of 1991, some critical and long
over due, reforms have been initiated by the government during the Corona
crisis. MSME sector which is widely recognised as a backbone of any developing
economy has been extended full support by the government with measures like 100
percent sovereign guarantee for uncollateralised loans, the defining structure
of MSMEs has also been changed. Also, an additional sum of 40,000 cr. has been
pumped into MNREGA. Along with relief for farm, infrastructure, discoms,
changes in Insolvency and Bankruptcy Code, establishing ‘infectious disease
block and labs for testing and treatment’.
The financial package that has been announced in India (through
sheer numbers) appears to be one of the largest in the world and it will certainly
help in instilling confidence in business community to an extent.
It has been predicted that the lockdowns 1.0 -4.0,
necessitated by the COVID crisis will lead to an approximate loss of 3-4
percent of GDP.
If we go by IMF’s recent estimation of 1.9 % growth in Indian
economy in Financial Year 2021 (a fall from earlier projected 7 percent growth
in October 2019)– it refers to a loss of around 5 percentage points in the
growth.
The present package will lead to an approximate of 3-4 lakh
crores of fiscal support i.e directly from the government’s balance sheet. This
is quite less than expected or needed. The measures announced by government are
more medium to long term and mostly monetary in nature, while economists and
experts were waiting for demand side relief looking at the existential nature
of the crisis.
Shri Rajiv Kumar, Vice Chairperson of Niti Ayog in an
interview to India TV on 17th May said that unlike other countries
India cannot afford things like ‘Helicopter Money’ as any excesses with
currency may lead fiscal deficit to slip out of control thereby adversely
impacting value of rupee, credit ratings as well as FDI.
The debate on whether government should have focused on
immediate relief for income support like direct cash transfer scheme or on measures
unleashing long term reforms; reminds me of the famous statement made by Keynes
when he criticised unrealistic assumptions of the Classical theory….. “ In long
run, we all are dead”!!!
Note: ‘Helicopter Money’ – a concept introduced by Milton
Friedman in 1969 and popularised by Ben Bernanke, Governor of Federal Bank,
when he mentioned the concept in one of his speeches in 2002. Helicopter money
refers to the process through which Central bank will print large amount of
money and put it directly in hands of consumers to increase their disposable
income. This money does not produce repayment liabilities on the government as
in monetisation of deficit by printing bonds.
**end**
Interesting
ReplyDeleteInformative
ReplyDeleteNice and informative read
ReplyDeleteBeautifully narrated the COVID situation linked with Indian economy in particular and world at large.
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