India’s Fiscal Response for the Post Pandemic Recovery Plan


India’s Fiscal Response

  • 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.

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.

Tools employed by countries to deal with the economic slowdown caused by pandemic: 

  • 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.

How can India learn from world experiences?

  • 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.

What should India do now?

  • 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.

Q) India should revive demand by ensuring that people have more money in their disposal. Examine the merits and demerits of deficit monetization as a tool for post-pandemic recovery plan.