Economic Stimulus: Size Matters, But Direction, Velocity, And Target Key To Revival
The pandemic has turned the world upside down, impacted almost every sphere of life.
Wave 2 has intensified the suffering of a billion people, and scarred the poor for a lifetime. It has mortally affected health, materially the livelihoods. The pandemic has eroded the socioeconomic fabric and threatens to undo decades of progress.
Consequences far beyond, aftermath brutal, will last for years
The momentum on poverty eradication and gender equality has snapped. It is likely to push social mobility by a couple of years for the poor, a decade for the most deprived. Inequality will creep up, faster than imagined. Students’ progress is at risk as schools remain closed; even as a large percentage of girl students in rural India may not be schooled at all.
The impact on working women (over-represented in low-paid jobs) will be even more far reaching. Even after vaccination our elders and the ‘vulnerable’ will continue to face social disconnectedness, even isolation, resulting in depression and anxiety.
The pandemic has highlighted the lack of health infrastructure in rural India. Many were denied access to healthcare. Lockdown has denied livelihood opportunities to the migrant labourers. Millions in the unorganised sector have lost jobs. The economy is broken, compounding the distress.
Key indicators are nosediving. Pandemic has exemplified the fragility of the business models; highlighted the frailty of the ecosystem. Lockdown has demolished demand, sapped the supply chain. Millions of MSMEs face an existential crisis. The ‘aspiring’ midsized entities have lost their spur. Small will go chronically ill, most micro enterprises will suffer, bereft of support may face closure.
Epidemics are never ‘only’ a health issue; and never in isolation
Covid-19 has underlined this as never before. The bereaved lost their dear ones. Those suffering hospitalisation have seen their assets evaporate; amongst them the poor, have lost life savings. The resolve is depleted.
However, it is the loss of livelihood that will prolong the distress.
Our economy is fragile, precariously brittle and susceptible. The economic distress (result of the lockdown) should not have surprised our policymakers.
A Crux study across the 85 most severely affected districts reveals that 75% of the poorest believe government schemes and stimulus is inadequate, poorly targeted and delayed. It will barely make a difference. Similarly most who suffered hospitalisation feel the government celebrated prematurely. It admitted its folly reluctantly, acted without a holistic plan or purpose.
Many believe India was lucky (not prepared) to escape the full fury.
Poorest have ‘not much’ to lose
The poorest section does not dread the third wave. The second wave has taken away everything they owned.
The contours and the tone of the stimulus package highlight the flaw & indifference in policymaking. The Crux study articulates it is not the size of the stimulus package but the direction, velocity and the target that is key to revival. Lockdown has resulted in ‘real’ loss in economic output. Similarly, a month’s delay in vaccination will postpone revival by 3, impede growth rate, decrease employment opportunities by 5%.
Our urban poor & lower middle class is cash strapped, and vulnerable to socioeconomic disruption. Consumption is not picking up as the consuming class (demand creators) plan for a ‘pandemic’ day. Lack of consumer confidence has hit demand, prolonging the distress.
Consumption triggers virtuous growth cycle
Our economy is consumption led; demand creation is low ‘hanging’ (propensity to consume is high).
India has the fiscal space to reduce taxes, leave money in the pockets of the consuming class. A Crux insight estimates, if only half of the stimulus package is well-targeted it will increase consumption and the demand thereof by 40 percent. This will trigger demand, ‘persuade’ consumer spending and nourish the economy. And a long term multiplier
Stimulus initiatives require a more focused, well-targeted approach to tackle the misery of the pandemic. It needs effective templates, even unique playbook. The policymakers must characterize sectors; identify and targets schemes & benefits accordingly. Stimulus must induce significant & ‘expansionary’ measures that augments demand, rekindles consumer confidence and suppliers’ faith.
Fiscal chest has the resources to fortify the smaller businesses. The Crux study highlights that the MSMEs benefit from demand creation, and faster turnover. They do not need guarantees, or loans. Fair treatment & enabling environment is pivotal. As an example, tweaking the GST framework where the MSMEs pay tax after ‘collecting’ will augment their working capital. Well targeted and effective stimulus package will add another 100 lakh (they employ 70% of the labour force) jobs.
Similarly, if the government pays and ensures payment within the contracted period it will lubricate the liquidity pipeline and foster growth momentum.
While we aim for revival, it is important to focus on the shape of the recovery curve. A K-shaped (with different parts of the economy growing at different rates) recovery doesn’t auger well.
K-shape recovery may mean the larger entities seizing opportunities from MSMEs and growing at their cost. It will accentuate the fragility of the economic ecosystem.
Highlighted, exposed, amplified
Policymaking is meandering. Approach has largely been scattered & dispersed. Stimulus packages are sprayed, support not holistic enough. Loans, tax deferment and several other frivolous ‘sops’ do not repose confidence to invest and spend.
Businesses thrive on demand, are tight fisted in a slowing economy; and don’t invest. The government must lead investment, loosen the purse strings, and spend for revival.
The socioeconomic cost of the pandemic will manifest as diminishing incomes, job loss etc. But beyond hard numbers, more worrisome impact will be poor health, indifferent learning, financial insecurity, domestic violence, creeping inequality, unrest. It will adversely impact several other societal indicators.
Designing ‘economy focussed’ policies has never been our strength. Similarly, implementation is the Achilles heel.
Amid the extraordinary calamity, the Prime minister must reach out, ensure the healing touch. In a ‘deprived and scarcity’ environment nothing works better than a sense of financial security, and the confidence that the state will ‘provide’.
The government has the thermometer, takes the temperature but is not willing to treat the fever.
Governance requires a holistic approach, but above all, will & intent.
