A well balanced stimulus package

Context: The fiscal stimulus package by the government amidst constraints and compulsions has nevertheless provided well-balanced and bold solutions. However, certain problems persist even after liquidity push.

Twin Mantra of the package

• Ensuring the minimisation of the human cost of the COVID-19 crisis.  

• Converting crisis into an opportunity by implementing bold structural reforms.

Steps taken:

• Lifting demand:  Total effective demand is made up of demand for consumption, investment, and intermediate goods. Steps taken include:

• Investment demand: Additional credit lines provided to MSMEs and Farmers.
• Consumption demand: through direct benefit transfer in female Jan Dhan accounts, reduction in TDS and TCS, allocation for MGNREGA etc.

• Surging Supply: On the supply side governments response is four-fold:

• Food Security: Declaring agriculture as essential services, extensive procurement operations etc.
• Prevented liquidity crunch: through moratoriums in debt service obligations for all businesses, additional credit lines without collateral, providing relief to service sectors like hospitality etc.
• Liberalisation: Improved the ecosystem for private producers in both agriculture and manufacturing, freed traders and exporters from the Essential Commodities Act and further liberalisation in the defence sector will lead to self-reliance.
• Re-Stocking: Credit for re-stocking been provided to families and street vendors to support livelihoods.

Problems with the Liquidity Push

• Negligible Direct Transfer: Excessive reliance on enhancing liquidity has not been able to provide succour to the micro and small businesses.
• More focus on NBFCs: Previous measures like Long Term Repo Operations, investment in cheap capital provides little evidence of improvement. Banks are wary about lending to NBFCs as they are prone to default.
• Crisis Intensification: There are possibilities of defaulting of fresh credit provided to the already suffering firms. This might lead to an increase in the NPA in case if credit flow didn’t revive. 
• Disposable Income: measures of Advance access to savings (lower tax deduction at source, reduced provident fund contributions) are marginal in scope.

Way Forward

• Provide cash: Fiscal conservatism and tax forbearance should be complemented with providing cash to the people in the form of wage subsidies through low-interest borrowing or “monetisation” of the deficit.  
• Glocalisation:  Buoyed by the fiscal chances, there is an opportunity for local manufactures to become ‘Glocal’ and participate successfully in global value chains.