Modi’s Rs 20 lakh crore is all optics, no substance

Prime Minister Narendra Modi’s ₹-20-lakh-crore plan to fight COVID-19 may go down as one of the biggest disappointments in our history. The plan, like everything the Prime Minister says or does, was a magnum opus in optics but a damp squib in delivery.

The only thing that could be considered a solace was a\₹ 40,000 crore increased allocation for MGNREGA but considering the sheer size of the problem we are up against, the money may not make a significant impact. The additional allocation would mean an additional ₹ 3,728 for the 12 crore plus MGNREGA workers or just about an additional ₹327 per month for the remaining 10 months of the financial year. The additional allocations for MGNREGA too are unlikely to provide any immediate relief.

For an economy that was stated to be ready for take off for several years, we are headed for serious trouble as the government has buried its head in the sand. The message seems: You are on your own, brace for impact.

When the Prime Minister announced the ₹-20-lakh-crore package, the entire nation was filled with hope. For those who were watching the economy closely, we knew that something was amiss as the government did not have the fiscal space as years of slowdown had depleted all reserves. The question was if the government had the political will to do something radical and provide immediate relief and stop the economy from going into a tailspin? The fact is that the government has done very little.

The entire effort of the Union Finance Minister has been on ensuring liquidity in the market through loans and temporary interest relief to some sections, but they don’t seem to understand that this may not be enough in the circumstances. Even if the banks work 12 hours a day, 7 days a week, it would be months before these loans can be distributed. We have lost 47 days in the current financial year and by the time these loans hit the market, consumption cycles would be hit heard.

The Union Finance Minister had two options: look at the reality on the ground or pretend that it was business as usual. The government decided to go about its business believing that things will settle down with some reduction in revenue in the short term. The government’s total additional outgo for COVID response could be in the range of 2 to 2.5% of the GDP which may not be adequate to ensure relief in the short term as the five-episode revival plan was essentially an exercise to represent the Budget she had presented about three months ago.

The biggest problem now is that we have reached a point where a further extension to the lockdown has become economically unviable and the government would have to open up a large part of the economy. If they don’t do this, we may see many more small businesses closing down and many more large companies forced to lay off people. The total number of people unemployed has already crossed 12 crore, according to CMIE estimates and about 1/4th of the working population is already unemployed.

What the government perhaps does not understand is that the tax-paying middle class has been hit the hardest by the COVID lockdown and the global impact of a consumption decline. Indian commodity and services exports are going to be hit hard as other countries are going to focus on improving domestic employment. A cut in TDS and deferring of tax returns would not be enough.

While images of migrant workers walking hundreds of km to get home are heart wrenching, what awaits the middle class is going to be equally challenging. They might have spent the last two months at home, but their challenge is going to begin when the lockdown is lifted and economic activity resumes. Most companies are going to see a drop in sales which would make a reduction in work force almost mandatory for companies to stay afloat, possibly pushing the economy into a negative spiral.

The government could have intervened and provided immediate relief to people through direct cash transfer to the poorest of the poor and provided a mix of loans and cash transfers to companies to ensure that they could keep basic demand-supply-demand dynamics running. This is where the stress is going to build up and the real impact would be visible in the next couple of months when this downward spiral begins to hit.

Let us hope it does not because if it does, it will cause unspeakable pain for every Indian.