Let us not mistake today’s economic crisis in India for a purely Covid-related one. The Indian economy has been in slowdown mode since 2015. The past 5 years have been marred by one economic blunder after another, causing untold hardship and misery to millions of Indians. I won’t go into the details of those bad decisions because enough has been written about them already, including by me on this blog.
The worst decisions were demonetization in 2016, followed by the twin-disaster of launching GST in 2017, while demonetization was still playing out in all its demonic forms. The other set of blunders were after re-election of this government in 2019, when the slowdown had become apparent even to the leadership but attempts to revive the economy came mostly in the form of tax breaks and giveaways to corporations. The fact that India was still reeling from the effects of demonetization and that unemployment had risen and consumption demand was slowing, along with investment, seemed to make no difference to policymakers.
Worse, the country was consumed by anti-CAA and NRC protests, in the wake of the bifurcation of Kashmir, and the NRC exercise in Assam. This government thought that it was enough to pander to the wealthy corporates and to upper caste Hindus to move ahead swiftly on all these contentious issues.
In this long saga of economic missteps, Covid is only the latest disaster to hit us. The government first announced the lockdown as a one-day PR exercise, calling it a Janata curfew (people’s curfew) on a Sunday. Then they extended it by a fortnight until mid-April, with a complete lockdown on all movement, barring essential services. Even then, they didn’t anticipate or consider what would happen to millions of migrant workers who are daily wage earners in India.
In a matter of a few days, millions of migrant labourers started to leave India’s towns and cities in a mass exodus back to their villages. They were stopped and beaten up by the police in many states for violating lockdown rules. No arrangements had been made for their food and shelter, because no thought had been given to it. In the meantime, the Indian Finance Minister announces an economic package meant to protect the poor, including India’s farmers, but at a paltry Rs 1.7 lakh crore (trillion) it was an apology of a stimulus package. I use the word stimulus deliberately because that is what it is being called, when it should instead be considered a relief package. The same urgency and scale of relief operations as in a natural disaster, should apply here as well. After all, it is a health emergency, due to which hundreds of thousands are likely to lose their lives and livelihoods in the coming weeks and months.
We were then told more stimulus is coming. It was only 40 days later that the PM announced an economic stimulus package of Rs 20 trillion that would cover a whole host of issues. At around 10% of GDP, the economic package does sound impressive for a country like India. But the devil is always in the details and those will unfold over several weeks.
40 days is a long time in the middle of health and economic crises, to wait for help. Fortunately, the RBI stepped in with a large interest rate cut as well as a cut in CRR (cash reserve ratio), pumping in liquidity to the tune of Rs.1.37 trillion to allow banks to lend more. The central bank had also asked banks to put EMI payments on term loans on hold for three months. A slew of measures was announced, from TLTROs (Targeted Long-Term Refinance Operations) allowing banks to invest in corporate bonds, open market operations, dollar-swap lines opened and several other steps that helped ease liquidity conditions as well as boost confidence in financial markets. All told, the RBI has provided for credit flow and liquidity of Rs. 8 lakh crores into the Indian economy.
The economic package that has been announced after 40 days and over several days of press briefings, in dribs and drabs, amounts to some relief for the poor and vulnerable, but not nearly enough to boost demand. It is clear that more attention was being paid to what many have called accounting jugglery, so as to not increase the fiscal deficit beyond the additional 2% of GDP.
The focus in the first tranche is on helping the MSMEs (micro, small and medium enterprises) stay afloat and run their businesses and left out the poor and migrant labour. It has thrown MSMEs a lifeline of Rs.3 trillion, which the government believes will help an estimated 45 lakh small businesses and in turn, a few million workers. Besides easing access to loans and repayment terms, the government will also take equity stake in these enterprises to a total of Rs. 50,000 crores. Other significant steps are to help NBFCs (Non-banking financial companies) as well as struggling power distribution companies.
While this is all very well, the fact that the Indian economy faces a huge contraction in consumption demand has been completely overlooked yet again. Millions of migrant labourers returning to their villages and millions of unemployed have not been addressed adequately when they face an urgent crisis. The economic package allocates merely Rs.3,500 crore for migrant labour as well as free food for them for two months through the PDS system. While farmers have easier credit access to working capital through NABARD to the tune of Rs.30,000 crore. The budgeted MNREGS spending of Rs. 60,000 crores has been increased by Rs. 40,000 crores. That is not going to be enough to stimulate demand, when we know that the lower middle classes as well as the rural poor are the mainstay of consumption demand in our country. Especially of essential goods and services during a time of lockdown.
Both the numbers of migrant labour and the unemployed are swelling, while the economy goes into a comatose state. India’s unemployment surged to 27% in the immediate wake of Covid and has since fallen slightly to 24%, according to CMIE (Centre for Monitoring the Indian Economy).
Worse, the few corporate earnings that have been announced so far, all point to a sharp slowdown in demand, especially in consumer durables and capital goods. The latest IIP (Index of Industrial Production) shows a 16.7% contraction in industrial production with manufacturing contracting by over 20% and consumer durables shrinking by over 30%. The PMI (Purchasing Manager’s Index), a narrower measure since it covers only around 500 private sector companies, is also sharply down from the previous month. April Manufacturing PMI came in at 27.4 and Services PMI was even more dismal at 5.4, dragging the overall composite PMI to all-time lows of 7.2.
In the midst of all this, of course, is the main culprit: the pandemic. The numbers of new cases are still rising each day and so are the deaths from Covid-related causes. The government insists that community-transmissions are not taking place, when all indications are that they must certainly be responsible for the large numbers of cases being reported, especially from certain states such as Maharashtra, Delhi, Gujarat and Tamil Nadu. With the country in a state of lockdown for well over a month, overseas or domestic travel can hardly be the reason for fresh cases. And we are still not testing adequately.
Most Covid-related issues have been left to the states to manage. And while Kerala has been lauded for its handling of the pandemic, other states have been trying to usher in what they call reforms. In the process of trying to liberalise archaic labour laws, state governments such as those of MP and UP have done away with many sensible labour regulations as well, such as those to do with minimum wage and minimum number of workers required for the permission to retrench workers, etc. Just when labour is being laid off and is facing a crisis, labour reforms seem like an answer to a different problem, not the one we have at hand. It is a knee-jerk reaction to the Covid crisis and state governments are responding with neo-liberal reforms in a bid to attract investors, including through ordinances. Then, there are media reports of certain other states suddenly allowing businesses to purchase land directly from farmers. You have to wonder what any of this has to do with the Covid crisis, which apart from a health crisis, presents a real lack of demand in the economy.
The CEO of Niti Aayog, the new avatar of the government’s planning commission, Amitabh Kant, writes a leader in the Times of India full of enthusiasm for these reforms, including some that weren’t reported in the media: the dismantling of agricultural produce markets in many states, which in past decades have led to huge distortions in price and supply, as well as farmers not being remunerated well enough. If true, this last reform is a welcome one, but is this the time and the right way to enact reforms?
What’s even more bewildering is the fact that the PM and other leaders are trying to project these initiatives as “turning a crisis into an opportunity”. Opportunity for whom, I wonder. And when the crisis is itself self-inflicted (I mean the long-drawn economic one), is our only option to hurtle towards tinkering with policy and call it reforms? The reforms being unveiled to try and attract more investment, especially companies leaving China, is a mirage. It is something we should have planned and worked towards, several years ago. Right now, the priorities should be to attend to the immediate crisis at hand and focus all our attention on it, not scatter our efforts.
Over several tranches of the Rs 20 lakh crores economic package announced with such fanfare, it appears that more effort has gone into providing a stimulus to industry, especially small and medium enterprises, which is indeed necessary to keep the economy moving, but much more needed to have been done to help the poor, the unemployed and the vulnerable. Instead, the government has spread itself thin, by trying to initiate big-bang reforms along with the economic relief package. And my fear is that it will achieve neither, because it will not be able to do justice to everything on the agenda. Besides, revival depends on RBI’s stimulus measures which, at Rs. 8 lakh crores, need to move smoothly through the banking system. And equally, revival of consumer demand, which needed much more money in the hands of the poor.
Surely, we can do better. But we need calm and sensible minds to think over the immediate crisis that is facing us and identify it correctly first. Then formulate a set of policies that will take us through stages of recovery. It’s what is called scenario planning in the corporate world.
Immediate problem – hardly immediate when you consider it’s been with us for years – is lack of demand. And without adequate demand, no amount of reforms is going to create new investment or jobs. It means the government has to put adequate sums of money into people’s hands and those people are the ones who will consume because they need to, not because they like to, or because it’s good to. I have written before on the need to increase spends on MNREGS, and pump money into the rural economy because that is where the bulk of the demand that will make any significant economy-wide impact resides, not in the miniscule tax-paying salaried class or the urban self-employed professional class.
Instead the MNREGS funds were slashed in this budget, with more funds going to the PMKISAN programme. Now, we have millions of migrant labourers returning to their villages to add to the rural unemployed. They will not return to cities anytime soon, especially after the ordeal they have just endured. Even if they join MNREGS, what will they be doing? Desilting more rivers and canals or building more wells? It is perhaps time to rethink MNREGS and put these people to work on rural projects that will help build more permanent rural infrastructure. I am thinking especially of rural roads as well as granaries for our foodgrains and other agricultural produce that this country sorely lacks. In doing so, we will also be building up their skills for work that can earn them better incomes in future.
Next, we need to think about our urban slums; as congested, filthy, and pest-ridden residential areas in our cities, these are hotbeds of disease and ill-health. We need to address slum-dwellers immediately, paving the way for better-planned and constructed habitations for them on a regularized basis. As part of the urban poor and lower classes, these are also people who are big contributors to consumption demand. And their very lives are at risk right now.
If anything, these are the immediate reform areas that we should have focused on. They are Covid-related and will help us deal with the next pandemic better. Covid-19 is only a recent shock to an economy that has long been slowing down. Before the opportunities and so-called “bold reforms” create more crises for us in future, let us understand the current crisis a little better and present more relevant solutions.
The featured image of houseboats on the backwaters of Allapuzha in Kerala at the start of this post is by Kyran Low on Unsplash