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28/05/2020 7:39 AM IST | Updated 28/05/2020 7:57 AM IST

‘A Lot More Pain To The Economy’: Former Finance Secretary On Modi Govt’s Aatma Nirbhar Stimulus

Subhash Chandra Garg explains why the Modi government’s “suboptimal” relief package won’t rescue the economy.

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Former Finance Secretary Subhash Chandra Garg. 

NEW DELHI — The Narendra Modi government is under fire for rolling out an almost entirely liquidity and credit-driven stimulus package, while spending a mere 1% of India’s Gross Domestic Product (GDP) on migrant workers and small businesses that have lost everything in one of the world’s most punitive coronavirus lockdowns. 

In a conversation with HuffPost India, Subhash Chandra Garg, the country’s former finance secretary, who took early retirement from the Indian Administrative Service following disagreements with the Modi government last year, explained why the “suboptimal” stimulus fails to rescue the economy and rehabilitate the most vulnerable. 

Chandra, who has also served as India’s Economic Affairs Secretary and a former Executive Director of the World Bank, said, “Every decision you take has some consequences. If you take decisions like not assisting the businesses and jobless workers, there will be a lot more pain to the economy.”

Edited excerpts:

The fiscal spending in the economic stimulus is not enough. 

Of course, it is very less. There has been a massive disruption of businesses. 70% of the economy remained shuttered in April. In May, close to 50% of the economy is still not producing. Seven crore small, medium and micro businesses have gone out of business. Some estimates suggest that over 10 crore workers have lost their jobs. The government needs to provide a good deal of assistance to business so they can survive and revive and restart their businesses. That requires the government to spend around Rs 5-7 lakh crore in assistance to businesses on the fiscal side, and around Rs7-10 lakh crore on the workers. 

I don’t like this term ‘stimulus’. Stimulus normally works like a steroid on the demand side. We don’t need steroids at this moment. We need people to carry on with their lives. The government package should have been entirely fiscal support for survival and revival. This mode of using credit and guarantees is really going nowhere. This, in fact, is compromising the credit culture in the country. It will do more harm to the financial industry and banks in the long run.  

The government package should have been entirely fiscal support for survival and revival.

One set of direct benefit transfers to construction workers took over a month because state governments did not have the bank details of even registered beneficiaries. Do migrant workers need more fiscal assistance? 

Absolutely. Migrant workers are the most vulnerable and need more. They do not have a place to stay. They have lost their savings. They are strangers or guests in the cities where they work and live. They had to walk hundreds of kilometers and take all sorts of transport to somehow reach home. They needed cash, food and some maintenance expenditure. If that had been provided, I believe they would not have gone. They left out of desperation to survive. But wherever they go, they need financial assistance to survive and live their lives. NREGA (National Rural Employment Guarantee Act) is not a perfect solution for most migrants. Some migrants may get some wage support but a lot of them require other financial assistance from the government. 

I know the government said that it is difficult to register migrant workers. I don’t agree with that kind of characterisation at all. If we can register 9 crore farmers for the PM Kisan scheme, we can register 10-15 crore migrant workers. Everyone of them now has an Aadhaar ID. Almost everyone has a bank account. Even if there is some leakage, we can reach 80% to 90% of them. I’m entirely for cash transfer into the bank accounts of migrant workers to provide at least 30% to 50% of their loss of wages. 

I’m entirely for cash transfer into the bank accounts of migrant workers to provide at least 30% to 50% of their loss of wages.

What about agricultural workers?  

The agriculture segment is much less affected by the Covid crisis. We had a good harvest, especially on the cereal side of the food grain and fruits. But some discretionary items like flowers and vegetables have also got affected. So, landless labourers and farmers have been affected, but that in my mind is a smaller number, maybe about 10% of the 13- 15 crore workers and farmers who are into cultivation. A cash transfer scheme like the PM Kisan Yojana for farmers is needed for non-farmers as well.

The relief the government said it was providing through the PM Kisan Yojana was only an early payout of the Rs 2,000 — the first instalment of the Rs 6,000 due to farmers under the scheme every year. It is meant to meet their agriculture and domestic needs, not coronavirus relief. But it was talked of as a coronavirus relief measure. 

It is not additional but it was certainly fast-tracked. 

But why ask farmers to use what is due to them as coronavirus relief? Was additional cash needed? 

Like I said earlier, the farming sector is not very badly affected because of Covid. I don’t think it needed to be additionally supplemented. 

Talking about it as coronavirus relief creates a perception in the mind of the public and that is duplicitous. 

When you get into these kinds of terminologies, you get into the political space. Every political party has a tendency to describe what they are doing in favour of the people. I don’t want to enter into that kind of discussion. 

I understand that you don’t want to get into the political discussion, but we have seen this kind of posturing several times. For instance, the MGNREGA hike in wages is calculated every year, but that too was clubbed as coronavirus relief. It is misleading. 

If the ways and means advanced by the centre can be styled as a stimulus package, you can very well characterise the increase in MNREGA wages as part of the stimulus package. In its true nature, neither is a stimulus. But that is a matter of communication and presentation that any formation (political party) would like to use. I think it falls on the commentators and agencies like yours to bring out the facts. 

Why is the government not spending more? 

There are three possibilities in my mind. First, a misreading of the crisis. Perhaps it is being equated with the global financial crisis of 2008-2009 and the large stimulus then that had consequences on inflation and expanded the government deficit for a long time. If you believe this is a similar crisis, then you don’t go for the stimulus route used in 2008-2009. But the current crisis is a real economy crisis and needs a real stimulus package. 

Second, there is always a massive debate inside the government about the merits and demerits of the fiscal rectitude. We have enormously bad consequences of fiscal expenditure. When the deficits run large, it deprives private sector investment, it upsets the financial economy, the rates of interest go up. If you ideologically prefer a lower fiscal deficit, then you are not in favour of such an expense.

Third, if you take measures like cash transfers, you will have to do certain new things which may have risk. For example, to raise the additional money, you may have to monetise the deficit. The consequences of monetising the deficit may not be appreciated. The fact that you have to register 7-8 crore businesses and 14-15 crore workers might lead to corruption and leakages. You don’t want to take those risks and opt against that route. You believe that people can take care of themselves. 

The government announced pre-existing schemes with past budget allocations in the animal husbandry and the fisheries sectors as if they were new schemes to be set up following the coronavirus pandemic.  

You are correct. The infrastructure funds for most schemes in fisheries and animal husbandry have already been announced earlier. The new thing was that the scale of those expenditures and provisions have been massively hiked. The government’s intention may have been to bring out that this is a massive expansion in these schemes. I think we need to see a track record of their implementation so far and a future pragmatic likelihood of the implementation. That kind of expansion under these schemes would take 10 years to even spend 50% of what has been announced.

The money allocated to the pre-existing Animal Husbandry  Infrastructure Development Fund (AHIDF) was indeed increased, but the stimulus allocation for the Pradhan Mantri Matsya Sampada Yojana is exactly the same as the previous budget allocation. Once again, this is misleading. This is not about getting into politics. This is a factual issue of including pre-existing schemes and funds and presenting them part of the new stimulus.

In terms of facts, what you have stated is correct. 

The Reserve Bank of India has cut the repo rate at which banks borrow to an all time low of 4% since March, but this is not leading to banks giving out more loans.

 The initial announcements by the Reserve Bank was to pump a lot of liquidity into the banking system. I think it was a misreading of the situation. When the banks received this liquidity, the expectation was that they would lend. But that was based on the banker’s risk assessment of the borrower — that was very poor. Already, the NPAs (non-performing assets) on the industry side were very large and then the Covid-19 related lockdown made their credit situation and investment plans worse. In that situation, banks are naturally disinclined to lend to businesses and borrowers. So, the assumption that the banks would be forced to lend if you lower the reverse repo rate did not come out to be true. It was not likely to come out to be true. The banks literally deposited that liquidity back in the Reserve Bank. This excessive belief of the banking system being used to lend is the same issue with the economic package the government has announced. It also uses this credit pipe of banks, and says that the government would give guarantees, assuming the banks would lend. I have a huge suspicion that this won’t work as the RBI’s liquidity infusion did not. This might meet the same fate. I think it’s a lot of hope, but an unlikely flow of funds to businesses. 

The initial announcements by the Reserve Bank was to pump a lot of liquidity into the banking system. I think it was a misreading of the situation.

What is the economic fallout of the coronavirus on India’s white-collar workers?  

The white-collar workers are much less affected. There are about five crore of them including in government employees, public sector, organised industry, and financial services. They are by and large safe. In the situation that has got created now, they are not able to spend on discretionary expenditure — so not much travel, movies, going around buying expensive clothes. This has ironically resulted in a consequence which you would not expect. These people are putting a lot more money into their banks and deposits accounts. In April, the deposits have expanded by about Rs 3 lakh crore, which is about 25% of the annual increment in deposits. In one month, you would have expected that they are stressed, but they have more cash in their hands than they can spend. 

In one month, you would have expected that they are stressed, but they have more cash in their hands than they can spend.

As the former Finance Secretary, how do you feel about the stimulus package? 

It should have been better targeted towards the businesses and workers who have lost jobs. Their genuine real needs should have been addressed. 

But how do you feel?  

I described how I feel. I think in policy-making, one does not need to be emotional. Every decision you take has some consequences. If you take decisions like not assisting the businesses and jobless workers, there will be a lot more pain to the economy. I’m reasonably convinced that this year we will have a contraction in the economy, maybe in the range of 5 to 10 percent. Today (26 May), the State Bank of India brought out a paper saying the economy would contract by 6.8%. I’ve been sensing this for the past 4 or 5 weeks. The (stimulus) decision and its consequences should be analysed dispassionately and unemotionally.

I’m reasonably convinced that this year we will have a contraction in the economy, maybe in the range of 5 to 10 percent.

But it is emotional. People have died. Lives and livelihoods are at stake. 

If small and marginal businesses are closed, 10-15 crore workers are affected, and so many migrant workers are walking, it certainly is a heartrending and disturbing situation. What I’m saying is that you take decisions dispassionately to address the real situation. If decisions are made emotionally, that is a problem. 

You said by not assisting businesses and jobless workers, the government is causing a lot more pain to the economy. Is the stimulus making the economy worse?

The stimulus did not rescue the economy from the impact of closing it down. It does not rehabilitate businesses and workers, and puts them back on track. It’s suboptimal.

Would an interview with you on this topic  be very different if you were Finance Secretary? 

This is a hypothetical situation. When you are in government, you express yourself more within the confines of the government decision-making. I would be untrue if I did not express this inside the decision making. But when you are not in government, you can say the same thing in a more open manner. 

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