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.”
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.