Coronavirus – Economic Issues

Comparing fiscal responses to Covid on qualitative and quantitative basis

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- India fiscal response to Covid-19

For all the talks over the size of Atmanirbhar package, India’s response turns out to be inadequate when compared with the other countries with similar levels of per capita income. This article analyses the same.

Context

  • India’s fiscal response is compared to countries which are similar in GDP per capita, state capacity, and structure of the labour force.
  • Before the Atmanirbhar Bharat package, India lagged significantly behind comparable developing countries.
  • As of early July, the gap seems to have narrowed.

Comparison and challenges

  •  Due to the blurring of the distinction between fiscal and monetary components, ensuring comparable and accurate figures for fiscal responses is a challenge.
  • For example, the total Atmanirbhar package is billed at 10% of GDP by the government.
  • While the headline number for India’s fiscal response in international databases is around 4% of GDP.
  • But some estimated that the new fiscal outlay is around 1.7% of GDP.
  • Vietnam, Indonesia, Pakistan, and Egypt, all while averaging less stringent measures than those in India, have announced stimulus measures that are as large or more substantial, as a share of GDP.

Demand-side interventions in the package

  • The one significant demand-side intervention in the Atmanirbhar Bharat package was ₹40,000 crore of additional outlay for the MGNREGA.
  • Most other demand-side measures involve the frontloading, consolidation, or rerouting of existing funds.

How developing countries are financing responses

  • Developing countries are resorting to drastic means to finance COVID-19 responses.
  • Actions so far include the amendment of legal budget limits.
  • Some are also exploring enhanced issuance of bonds-including a ‘pandemic bond’ by Indonesia.
  • Central banks in many emerging economies are experimenting with purchases of public and private bonds in the secondary market (quantitative easing).
  • Or some are directly purchasing government bonds on the primary market (monetising the deficit).
  • In India, the debate continues over whether the Indian government should invoke the “escape cause” in the FRBM Act.
  • Escape clause will enable the central bank to directly finance the deficit.

Cash transfer: Lessons for India

  • Demand-side interventions announced by other developing countries could provide lessons for additional measures in India.
  • Of the World Bank’s list of 621 measures across 173 countries, half were cash-based. 
  • While only 2% related to public works, a clear indication of the popularity of cash transfers over public works for income support,
  • Countries have also significantly expanded coverage of their cash transfer programmes from pre-COVID-19 levels.
  • Bangladesh and Indonesia have increased the number of beneficiaries by 163% and 111%, respectively.
  • Indonesia’s cash schemes now cover more than 158 million people or 60% of the population.
  • Additionally, the Indonesia central government has directed village authorities to focus their budgets on a cash-for-work programme.

Suggestions for India

  • India could take these actions about cash transfers into account in decisions about expanding existing transfer programmes or even creating new ones.
  • India has been a leader in employment guarantee policies with its flagship MGNREGA programme.
  • This is the right time to expand entitlements MGNREGA.
  • There is a need to introduce an urban version of the MGNREGA.
  • In India, one reason for the subdued fiscal response and the resort to monetary measures is a concern with the debt-to-GDP ratio.
  • However, aggregate demand and confidence in the economy have slumped and may not recover for many months.
  • Additional fiscal outlay -would save lives and jobs today and might prevent a protracted slowdown.

Consider the question “How India fares in comparison with other countries over its fiscal response to Covid? Also examine the utility of income support schemes related to public works against the cash transfer schemes adopted by the other countries.”

Conclusion

Not spending more now, therefore, might only worsen the debt-to-GDP ratio if growth remains depressed. The fiscal outlay in the form of cash and in-kind transfers and expanded public works schemes is the need of the hour.

Original op-ed:

https://www.thehindu.com/opinion/op-ed/the-covid-19-fiscal-response-and-indias-standing/article32154153.ece

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