Following Prime Minister Narendra Modi’s announcement of a 20 Lakh crore package to revive the economy, Finance Minister Nirmala Seetharaman, unveiled the package and its components. This package is increasingly been seen as another eye-wash, similar to the earlier one announced by the PM, bereft of any real measures to kick-start the economy. Alok Jagdhari provides insight as to why it is nothing more than a parlor trick.
To understand the financial package, the current economic scenario worldwide needs some theoretical explanation on macroeconomics.
This isn’t just limited to India, but applicable across the world.
First lesson is about the various components of GDP.
The GDP can be calculated from the expenditure side with this equation
Y = C+I+G+(X-M)
C = Consumption expenditure
I = Investment expenditure
G = Government expenditure
X = Exports
M = Imports
In the current scenario C and I are falling precipitously off the cliff. That’s pretty obvious as a dangerous pandemic sweeps the world and restricts the ability for businesses, citizens and governments to operate normally.
In order to keep the Y from collapsing completely G, the only component that’s autonomous (kind of), has to go up dramatically. G also has a multiplier effect – ie for every 1 unit of government funding, the national income can rise 2x to 3x. Hence, a 5% increase in government spending could increase the consumption by anywhere up to 10% to 15%.
Hence, an increase in Government spending is a no-brainer.
However, this increase is G has to be real. Very real. Not a phantom increase in banking sector lending, nor an increase in contingent liabilities (i.e. the 300,000 लाख crore guarantee to banks).
The US passed 3 stimulus packages since March
A. An emergency spending package of $300b
B. A large package of $2.2 trillion
C. An additional package of $480b
Total spend = $3 trillion.
Even Donald Trump didn’t try to add the $6 trillion odd that the Federal Reserve has pumped into the economy as his own achievement or tout it as a part of his own rescue plan.
Meanwhile, in India Prime Minister Modi continues to play the game of parlor tricks – he takes a coin from you, makes it vanish mysteriously, and then proceeds to make it miraculously reappear from behind your ears and then hands it back to you. And then expects you to clap and give him a payment for performing such “magic”!
How do we know that the government hasn’t actually delivered a single additional Rupee in stimulus? Because the power to add additional funding lies with the Parliament and Parliament alone. Which would require the Finance Ministry to present a supplemental budget, have it passed by the various committees of the Parliament and then be put to vote in the Parliament. This is what happened in the US. Or UK. Or Germany. Or Japan.
But NOT in India. Because Indian government is simply playing parlor tricks. It’s busy rearranging deck chairs on board Indian version of Titanic hours after it stuck the iceberg called covid-19!
The 300,000 cr of MSME credit doesn’t require the Government of India to shell out a single rupee at the current moment. The move to send tax refunds is an administrative move, which is simply returning the money that never belonged to the government. Reduction in EPF contribution has nothing to do with the government budget. EPF is an independent entity/ trust for which government writes rules and whose corpus is largely deployed in government debt, but it’s not a part of the exchequer…
For sure, without the slightest of doubt, the monetary policy action is very important. Without the additional credit, and additional liquidity, there will be no tomorrow. However, liquidity via monetary policy is the like the blood infusion into a patient admitted for a heart transplant in a near death situation. And fiscal stimulus is that heart that needs to be transplanted. Irrespective of how much blood you transfuse into the patient, it doesn’t ever replace the need for a heart transplant.
But Dr Modi either doesn’t have the heart, or doesn’t know how to do the transplant, or simply doesn’t care. He thinks that the patient will somehow miraculously recover with more and more blood transfusion!
And he is wrong. If the fiscal stimulus (the real one, not the parlor trick) isn’t delivered very quickly and honestly very soon, the patient will not survive irrespective of how much monetary policy you unleash upon it.
Because if the G above doesn’t expand in a genuine real honest sense very quickly, then the nation will pay a very heavy price very shortly…
(The author is Chief Risk Officer at AQIS LLC, Advisor to The Board at Liquidfsi, Founding Partner at 92Angels. Views expressed are personal)