Note4Students

From UPSC perspective, the following things are important :

Prelims level : Aggregate demand

Mains level : Paper 3- Stimulus package to address demand side and supply side problems

Economic disruption caused by the corona crisis stems from both-demand side and supply side. So, the stimulus package announced was expected to address the issues on both sides. This article breaks downs the various elements of the package in demand-side as well as supply-side measures. We also know aggregate demand is not just consumption demand. So, this fact was also considered while deciding the demand-side measures.

Twin mantra of stimulus package

• 1) To ensure that human cost of the crisis is minimised, especially for those at the bottom of the pyramid.
• 2) To convert this crisis into an opportunity by implementing bold structural reforms.
• Such reforms will go beyond repairing the damage to the production capacities and enhance the overall supply response capabilities of the economy.

Impact on demand side as well as supply side

• The present crisis is far worse than both the Asian financial crisis of the late Nineties as well as the global financial crisis of 2008-09.
• It has seriously impacted both the supply and demand side of the economy.
• The government’s response has been to effectively address both these aspects.

Government’s four-fold response to address supply-side problems

1. Ensuring food security

• To ensure that the government declared agriculture and all related activities as essential services.
• This permitted the successful harvesting and efficient procurement of the critical Rabi crop.
• It also implied pumping in Rs 78,000 crore as new purchasing power in the hands of the farmers.

2. Preventing cash/liquidity crunch

• Preventing the pressing cash/liquidity crunch was necessary to avoid insolvencies and bankruptcies.
• An immediate moratorium was announced on their debt servicing obligations to commercial banks.
• This measure was reinforced for MSMEs, for whom an additional credit line of Rs 3 trillion without any fresh collateral was extended.
• MSMEs could also avail of new equity from the Rs 50,000 crore fund of funds and take advantage of the subsidiary debt facility announced by the FM.
• These measures provided succour to a large number of businesses, especially those in the services sectors like hospitality, entertainment and retail.
• The Rs 90,000 crore credit package made available to state discoms should also be included in this set of measures.
• It will prevent bankruptcies of state electricity utilities and the power producers, which would have had disastrous results.

3. Reforms in agriculture and manufacturing sector

• The third set of measures were directed to significantly improve the ecosystem for private producers, both in agriculture and manufacturing.
• Long-pending reforms to give farmers the much-needed freedom to choose their clients and for traders and exporters of agro-products to maintain necessary stocks have now been announced.
• Defence production and exports will get a new fillip with the liberalisation measures.
• Greater space will be given to private businesses in sectors in which public sector enterprises hitherto had either a monopoly or a predominant presence.

4. Credit to street vendors

• Finally, this is a measure that does not have a large fiscal footprint, but touches the lives and livelihoods of more than 50 lakh families.
• Under which street vendors all over the country have been given a credit of Rs 10,000 each for re-stocking and use as working capital.

Understanding the aggregate demand

•  It is important to point out that aggregate demand is made up of- i) consumption, ii) investment iii) demand for intermediate goods.
• So,  the cash-in-hand of consumers is not the only means for reversing the declining demand in the economy.
• Therefore, additional credit lines provided to MSMEs, vendors or farmers will contribute to the strengthening of aggregate demand.

Government’s response to address demand-side problems

• A significant number of measures were announced to hike consumption demand directly as well.
• Among these are:
• Rs 1.73 lakh crore for improving the incomes and welfare of the most vulnerable, including the 20 crore female Jan Dhan account holders who will receive monies directly into their bank accounts.
• Rs 50,000 additional incomes in the hands of those whose TDS and TCS were reduced by 25 per cent.
• Rs 40,000 crore additional allocation for MNREGA, which will provide jobs and succour to those returning to their villages from metros and cities.
• Rs 30,000 crore for construction workers.
• Rs 17,800 crore transferred to 12 crore farmers and Rs 13,000 crore transferred to states to finance the costs of running quarantine homes and shelters for migrant workers.
• These measures, which will directly benefit different categories of individuals, will surely raise the flagging demand — the necessary condition for triggering a fast-paced recovery in economic activity.

Consider the question “The stimulus package announced by the government in the wake of pandemic sought to address both the demand side as well as supply-side problems. Examine the various components of package and other reforms announced in the economy.”

Conclusion

Combined with the significant number of bold structural reform measures, which hold the potential to make Indian firms attain global scales and competitiveness and give the much-needed freedoms, flexibility and financial strength to our beleaguered farmers, “the package” promises to promote India’s economic recovery in the post-COVID-19 period.

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Various components of the economic package

Mains level : Paper 3- Impact of pandemic on India economy.

The article broadly discusses the impact of the pandemic on the Indian economy. While the package has been declared to alleviate the economic pain, the government faces the challenge of finding the resources to plug the gaps. Though pandemic erupted from China, it successfully controlled it. This along with the its calibrated approach towards strategic progression is going to stand China in good stead.

Grappling with the “unknown unknowns”

• Several weeks before the advent of the COVID-19 pandemic, India’s Minister for External Affairs delivered a lecture.
• In the lecture, he had observed that “what defines power and determines national standing is also no longer the same. Technology, connectivity and trade are at the heart of the new contestations.”
• He did mention a point about “known unknowns”.
• But the pandemic has forced us to face the “unknown unknowns”.
• Within a few weeks, his prediction would be overtaken by a tectonic shift in the global situation thanks to a virus and a pandemic.

Impact on India’s economy

• What distinguishes the present pandemic from earlier ones is its economic impact.
• The economic impact is perhaps even more threatening than the human costs involved.
• In the case of India, all forecasts have had to be shredded.
• Job losses have been massive, specially in urban areas.
• India’s exports in the month of April, for instance, were the worst in the past 30 years.

Finding resources for the stimulus package

• Well before pandemic India had been witnessing a persistent economic downward slide.
• Prime Minister Narendra Modi’s announcement of a ₹20-lakh crore stimulus package was, hence, timely.
• Even though economists now believe that in real terms it amounts to around 2% of GDP rather than 10% .
• Finding resources for even this stimulus package will, however, not be easy.
• The Centre’s finances are not in the best of health. It has already had to resort to a second tranche of $1 billion loan from the World Bank to support COVID-19 relief measures.
• The finances of States are, to say the least, in a perilous state.
• Questions are, thus, bound to be raised as to whether adequate funds would be forthcoming for relief purposes.

Important items in the the package

• Among the more important items are-
• Providing a stimulus to Micro, Small and Medium Enterprises (MSMEs) through a ₹3-lakh crore loan scheme.
• Helping other stressed business sectors such as non-banking financial companies, or NBFCs, power distribution companies and the real estate industry.
• Provisioning of free food grains to migrant workers for the next two months.
• Provisioning of a ₹1-lakh crore subsidy to agricultural cooperative societies.
• Hiking the allocation for the Mahatma Gandhi National Rural Employment Guarantee Scheme, or MGNREGS, by ₹40,000 crore.
• Extension of credit facilities to street vendors; interest subvention for small businesses, etc.

Criticism of the package

•  Most critics affirm that it has been a financial stimulus at best, and much less likely to provide the much-needed stimulus to the economy.
• A valid criticism is that the patchwork of stimulus packages reveals a disjointed mosaic of ideas and thoughts.
• Also, that these ideas such as liberalisation of various sectors like defence and aerospace would be more relevant to a Budget discussion than a stimulus package.
• Many are, hence, viewing the stimulus package as a panic reaction to an increasingly difficult situation rather than a deliberate plan of action.
• It is indeed difficult to see how in the absence of a proper and well designed plan, a patchwork of stimulus packages would enable India to return to growth rates of 7% to 8%.

China’s calibrated approach: Strategic progression

• Since its early recovery, China has followed a calibrated approach — one that stems from a policy of deliberate strategic progression conceived over the years.
• It may be worthwhile to understand the facts so as to underscore the gap that currently exists between China and India.
• In 2015, China’s President, Xi Jinping, had floated the idea of “a Community of Common Destiny of Mankind”.
• In this, he outlined China’s viewpoint on aspects such as economic globalisation and the information technology revolution.
• The Belt and Road Initiative — which encompasses policy, infrastructure, trade, financial, and people-to-people connectivity, and, implicitly also, security ties — was an adjunct to it.
• The 19th National Congress of the Communist Party of China (2017), thereafter, gave its assent, considering it essential to enable China to achieve pre-eminence status within the global order.
• Ever since, China has focused on-
• i) attaining economic and technological progress.
• ii) defining how power would be determined in the new globalised era through devising new international norms in many emerging domains such as cyber, space, artificial intelligence, etc.
• China also set about rewriting international rules, premised not so much on governing where global goods are made, but on setting standards that define production, exchange and consumption.
• China Standards 2035 plans to set new standards with regard to the Industrial Internet of Things (IoT) and define next-generation information technology and biotechnology infrastructure.
• China is hoping, to reap the “early bird” advantage, even as other industrial nations struggle to recover from the devastation caused by the COVID-19 pandemic.
• Internationalisation of Chinese standards would provide China a clear advantage by providing it an opportunity to set the standards in emerging industries such as high-end equipment manufacturing, unmanned vehicles, new materials, cybersecurity and the like.
• This would enable it gain a dominant position in the global economy.

India must plan well to cope with the China challenge

• Mounting an effective challenge to China at this time would require a well-conceived and carefully calibrated plan of action by India.
• As of now, this is not evident.
• India and China will certainly emerge from the pandemic more diminished than previously, but to varying extents.
• Each country will, no doubt, suffer an economic setback.
• But while both nations would be among the very few that would still have a positive growth rate in the near future.
• Which is 1% in the case of China and 1.8% in the case of India, according to the International Monetary Fund.
• Given the size of China’s economy, it does not translate into a massive shift in India’s favour.

Consider the question “Economies across the world have been bruised by the corona pandemic. There have also been talks of India being the beneficiary of changes in the global supply chains. In light of this, examine the issues and challenges that India may face in this regard.”

Conclusion

India would more than welcome some of the entities exiting China, but there are no “green shoots” to suggest that such a shift has, or is, about to take place. Many alternatives are available to these companies and it would be excessively optimistic on our part to hold on to the belief that India is the only alternative choice for most of them.