Between a stimulus package and a hard place

Business Standard     22nd May 2020     Save    
QEP Pocket Notes

Context: Due to the limited freedom available to the Finance Minister, the stimulus package has not fulfilled the expectations.

Recent Steps Taken:

  • Monetary Stimulus: Announcement of stimulus package comprising around 2 % of GDP Assisting various sectors including MSMEs, Agriculture and others.
  • RBI’s injection of liquidity: through various measures like Targeted Long-Term Repo Operations, cut in Cash Reserve Ration, refinancing of Small Industries Development Bank of India (SIDBI) etc.
  • Structural Reforms: Including APMC, Essential Commodities Act, freeing inter-state trade, FDI and privatization.
  • Relaxed Fiscal Deficit norms: States are allowed to expand their fiscal deficit to 5 % of State GDP, taking the combined deficit to 10.5%.

Critique of the steps:

    • Addressing migrant’s plight : Knee jerk reaction to the pandemic has created hardships for the migrant labour. Steps towards their wellbeing should have been taken earlier.
    • Insufficient stimulus: Under the facade of magnanimous Rs 20 trillion, their lies only Rs 2 trillion of actual spending by the government. This has ruined the expectation for industry bodies like FICCI and CII.

Way Forward :

    • The “3 T Test” of fiscal stimulus to be effective: which consists of Timely, Temporary and Targeted. To this one may add adequacy. 
    • The solution to monetize the deficit should be avoided as it can throw up serious problems of macroeconomic stability.
QEP Pocket Notes