- 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.