An insufficient relief

Context: Current stimulus has more focus on supply side but Special focus should be given on demand side for the revival of economy.

Assessment of Relief Package

• Agriculture: Concessional credit line of Rs. 2 trillion, but it is neither automatic nor assured and marketing reforms and infrastructure creation are distant promises.
• MSME: Rs 3 trillion line of credit not enough because lenders are not always supportive in extending loans and buyers already owe them around Rs 5 trillion. (MSME provides 25% of employment, 32% of GDP and 45% of Exports to the Economy).
• Corporate Sector: Distressed sectors such as airlines, automobiles, tourism etc. have been ignored.
• Migrants: Grossly inadequate relief package. This economic deprivation will have social and political consequences.
• Narrow Focus: these are policy reforms with longer term perspective but little cohesive focus on stabilisation and revival of economy in short run.

Fiscal Stimulus

• It is 2.66 trillion (1.2% of GDP) of which Effective fiscal stimulus is 1.76 trillion of GDP. As private consumer expenditure in India is 60% of GDP, its contribution to domestic demand will be minuscule.

Debate on supply-demand side measures

• Supply Side:  Speed of adjustment of supply side is slow because supply responses take time. Producers would not wish to pile up inventories of unsold goods.
• Demand side: Speed of adjustment of demand side is fast as income spent raise consumption demand without any time leg.
• Because of above reason, fiscal stimulus should have been larger. 

• But more fiscal stimulus is avoided considering the revenue shortfall, and fiscal deficit will exceed to 5.5% of GDP than estimation of 3.5% of GDP.

How to finance extra money for stimulus

• Provide extra fiscal stimulus (Rs. 7-9 trillion) financed by monetising the deficit (RBI buying more T-bills, printing more money now termed “helicopter money”)

• It cannot be financed by market borrowing, as it would drive up interest rates

• Issue with Monetising the deficit

• Fear of rising the inflation does not hold ground.
• It may create the fear of rating downgrade, but extraordinary time requires extraordinary measures.

• Monetising the deficit might be the only way of increasing aggregate demand.

Way Forward

• The Government must accept the necessity or wisdom of expansionary macroeconomic policies to set out its alternative plan for recovery as relief package will not suffice.