Business Today

Stimulus: Here is the Money

India badly needs a stimulus. Here's how to find the money
twitter-logoJoe C Mathewand twitter-logoE Kumar Sharma | Print Edition: May 31, 2020
Stimulus: Here is the Money
Illustration by Raj Verma

Think of a main battle tank coming at you. Firing a pistol won't help. The right weapon is an anti-tank rocket." US-based Alok Jagdhari, co-founder of angel investing platform 92angels LLC, cites the analogy to illustrate the need for a big and concerted financial package to revive economies held to ransom by the coronavirus pandemic across the world. Jagdhari has prepared a pandemic survival guide for clients to show the magnitude of the problem and macroeconomic response of various countries. India is missing from the list of countries that have earmarked between 5 per cent and 30 per cent of GDP for the purpose.

"Go big or go bankrupt," says Jagdhari. "Releasing things in dribs and drabs won't work. Addressing MSMEs (small industries) but not other sectors won't work." He adds that India should earmark at least 5 per cent of its GDP (Rs 10 lakh crore) to begin with to support the health of its citizens and the economy. And it should be done quickly. "With each passing day, the problem will become exponentially worse. It wont go from 5 per cent of GDP to 5.1 per cent of GDP in a week, but more like 5.5 per cent of GDP," he says. "If things are not arrested at this point, a number of enterprises will simply fold up. They won't be left alive to come back after a few more weeks."

As every country fights its own battle against the virus and the damage it (read social distancing and lockdown) is causing to its economy, there is no single, sure-shot remedy to help governments and businesses tide over the crisis. Estimates of half-a-dozen economists whose views Business Today brings together here varies from Rs 6 lakh crore to Rs 30 lakh crore, and anything in between, and 'as much as is needed'. "This is an unusual crisis. It is large, sudden and global. We don't know a lot of medical parameters, and hence its impact. So, this is not a time anyone can say anything with precision," says Arvind Subramanian, India's former Chief Economic Advisor (CEA), explaining the complexity of the problem.

How Much Money Is Needed?

"It all depends on how long the battle against the virus has to be fought," says C. Rangarajan, former Governor, Reserve Bank of India (RBI). He suggests India should spend at least Rs 6 lakh crore (3 per cent of GDP) on three types of expenditure. One is medical and healthcare expenditure to combat the virus. The other will be to alleviate problems of people who have been thrown out of employment, including migrant labourers. And the third set is to stimulate the economy by increasing the government's expenses and provide direct support to sectors severely affected by the virus. Marti G. Subrahmanyam, Professor of Finance and Economics at the New York University, feels the number should be much bigger. "The US is talking of $5 trillion or 25 per cent of GDP, and Germany, an even higher proportion, almost 30 per cent. I believe the total cost of intervention to the government in India will be Rs 30 lakh crore or $400 billion, which would still be only 13 per cent of GDP," he says. While Congress spokesperson Gourav Vallabh puts the number at Rs 6-7 lakh crore, former Chief Economic Advisor Subramanian and Devesh Kapur (Professor, Johns Hopkins University), who have jointly looked at the problem, say it should be Rs 10 lakh crore or 5 per cent of GDP.

Dr C. Rangarajan, Former RBI Governor - Photograph by Vikram Sharma

There is consensus among all of them that the only relief package worth Rs 1.7 lakh crore announced so far to protect the poorest and most vulnerable sections of the society through free food, fuel and a token fund transfer is not enough. The Centre is working on a package, or several packages. The question is: Where is the money? With subdued economic activity, less tax revenues and remote possibility of raising non-tax revenues, where will the government find money to provide fiscal support to industries, traders, farmers and professionals?

Printing Money

So, here is the money?

"We are in a situation where all forms of revenue are down. Taxes will be down, you can do foreign borrowings, but it is a bad idea. So, the only way left is to issue bonds to the RBI and get the RBI to print more money," says Pronab Sen, former Chief Statistician of India. The quantum of money to be printed will depend on the size of the stimulus, but whatever it is, the government should do it, says Sen.

Marti G. Surbrahmanyam, Professor, Finance and Economics, New York University

Rangarajan says monetisation of debt may become inevitable and the government may have to urge the RBI to print close to Rs 2 lakh crore or about 1 per cent of GDP to spare money for the stimulus.

"Unfortunately, given the budget realities in India, like most large countries with little fiscal space, there is no other choice. The government will have to issue huge amounts of debt, the RBI will have to print money and buy the debt, either directly or by forcing banks to increase their SLR (statutory liquidity ratio), while providing other relief to them through LTRO (long term repo operation) money," says Subrahmanyam. Gourav Vallabh of the Congress agrees, while Kapur and Subramanian say it should not be the only instrument to raise funds.

According to Pronab Sen, several countries are actively pursuing this option. Britain, for instance, has gone for quantitative easing, which means increasing the Bank of England's holdings of UK government and corporate bonds by 200 billion to 645 billion, financed by central bank reserves.

Debt Instruments

"India could issue Covid bonds to retail investors" says Sonal Varma, Chief Economist for India and Asia at Japan's financial services company Nomura. The relaxation of fiscal borrowing limit of states and relook at the current Fiscal Responsibility and Budget Management (FRBM) Act is what Varma says will allow governments to raise funds from within the country itself. Incidentally, public financing by issuing government securities, including to banks and LIC, is a key measure suggested by Subramanian and Kapur. India can raise Rs 4-5 lakh crore in this manner, they say. "The Central government's public debt, which accounts for 90.4 per cent of its total outstanding liabilities, stood at Rs 93,89,267 crore at end-December 2019. However, IMF estimates India's total government debt - Centre and states together - at 71.9 per cent of GDP (about Rs 200 lakh crore), in 2019. The debt profile is better than that of many others but does not allow the government to go overboard."

Arvind Subramanian, Former Chief Economic Advisor - Photograph by Shekhar Ghosh

Developed nations have taken the debt path. Germany triggered the clause for exceptional circumstances on March 25. This allows debt financing of a supplementary budget of ?156 billion (4.5 per cent of GDP) to cover response measures and an estimated reduction in revenues of ?33.5 billion (1 per cent of GDP), including the additional ?156 billion from supplementary budget 2020.

Expenditure Cuts

The total expenditure budget of the Central government for 2020/21 is Rs 30.4 lakh crore, almost the same amount which Subrahmanyam wants India to raise for the Covid-19 stimulus package. If we agree that unprecedented situations warrant unprecedented actions, a part of the expenses earmarked for the current year can be diverted to fight Covid-19 too. Vallabh did sound political when he said one should cut wasteful expenses, which included foreign visits of Prime Minister Narendra Modi and his grand plans for a new central vista in New Delhi. The latter can help save more than Rs 20,000 crore. He suggests cutting 30 per cent of all central government expenses other than salaries and pensions, as well as centrally sponsored schemes. "The total revenue expense is Rs 8-8.5 lakh crore. A 30 per cent cut will save around Rs 2.5 lakh crore," he says. Kapur is of the view that there should be switch in the expenditure budgeted by central and state governments. "Salary, wage, pension increase is not a priority. That should freeze. Subsidies on agriculture and power should be cut, because farmers will get direct help, through PM Kisan."

You dont need a foreign government to show you how to cut expenditure. India has already announced cuts in salaries and allowances of MPs and ministers. All central departments have been asked to reduce expenditure by 60 per cent from plans for the current quarter. On April 23, the government decided to freeze the dearness allowance to central government employees and dearness relief to central government pensioners at the current rate till July 2021. Cost cutting is already under way.

Professor Gourav Vallabh Spokesperson, Indian National Congress

Can We Tax More?

Kapur and Subramanian advocate a solidarity tax, an additional tax, on well-off people. "Wealth tax should be considered as solidarity tax. If the economy recovers, they (the wealthy) will get back their money (through rising share prices or business earnings). This should include India's billionaires, professionals like lawyers, doctors, accountants."

"Eliminating most middle class exemptions should boost tax revenues. Similarly, public sector jobs are stable, so one can have a freeze on salaries, wages and pensions. This will see the privileged group, the wealthy, the professionals and public sector employees making a contribution towards the Covid-19 fund," Kapur said while addressing a webinar organised by the National Council of Applied Economic Research (NCAER). You may not call it a tax, but South Africahas already set up a Solidarity Fund, to which South African businesses, organisations and individuals, and members of the international community, can contribute. The government is providing the seed capital. The private sector has already pledged to support the fund. Yes, very much like the Prime Minister Narendra Modis PM CARES Fund, which has already crossed Rs 6,500 crore in ollections.

The Oil Price Boon

The $40-45 billion forex savings from the recent crash in oil prices are double the Rs 1.7 lakh crore fiscal stimulus announced. Since the Centre hasn't cut the domestic prices of fuel, it retains the benefit as additional earnings. It ought to be ploughed into the economic stimulus. Given that oil imports are one of the major reasons for foreign currency outflow, this may ease foreign exchange earning pressure and allow the government to go for even monetary easing (printing currency) without the fear of depreciation of the rupee against the dollar and flight of dollars from India.

Since the government does not pass on the entire benefits of low prices of fuel to customers, this is an opportunity for it to raise excise duty on oil further and, in the process, augment its revenues. In fact, one of the proposals made by Vallabh is to set aside excise duty earnings from diesel and petrol specifically for the Covid-19 fund. According to him, the additional excise duty collections from fuel alone have crossed Rs 13 lakh crore since Narendra Modi took charge as prime minister in 2014.

Professor Pronab Sen, Former Chief Statistician of India - Photograph by Shekhar Ghosh

There has been no parallel for the Covid crisis in public memory. The 2008 financial crisis was managed through demand stimulus by governments in countries the world over. Today, demand is not the issue. Demand suppression through compulsory lockdown to control the spread of virus is the issue. It's not just an economy problem, it is a health problem that has a huge economic impact. "Rarely do we see a tradeoff between lives and livelihoods. The order of magnitude is 2 to 2.5 times of what we have seen during the global economic crisis in 2008," says Sajjid Chinoy, Chief India Economist at JP Morgan. According to him, for the nearest parallel, one would have to go back to the days of the Great Depression.

Multilateral Funding

The World Bank Group announced a $1 billion (about Rs 7,500 crore) fund to support India's health infrastructure to strengthen Covid-19 management efforts. The Asian Development Bank (ADB) has assured a $2.2 billion package to India, an offer the government is yet to take up officially. Separately, the World Bank's private investment arm IFC (International Finance Corporation) is working out a package similar to the one offered by the World Bank to strengthen the health of private enterprises. The BRICS Bank or New Development Bank and similar agencies are also setting aside funds to support countries in their fight against Covid-19. How much multilateral assistance should India seek in its attempt to find money for its war against Covid-19? Subramanian and Kapur say Rs 1-1.5 lakh crore can come from multilateral funding. Congress spokesperson Vallabh says he is okay with external borrowings if the terms are 'soft'. However, he is not sure about the quantum of funds India can expect from external agencies as every country, including developed economies, are seeking funds from multilateral agencies. "I am not against them right now. But I'm not very sure if we should be much dependent on multilateral funding since the pandemic is not a country specific problem," says Vallabh.


As Jagdharis Pandemic Guide to Clients' points out, the Great Depression, a severe worldwide economic depression that started off with a stock market crash in the US in 1929, left economies battered and resulted in strengthening of central banks, financial sector regulators, international institutions and mechanisms. No wonder Jagdhari calls Covid-19 a mix of the Great Depression and Spanish Flu, a global pandemic which killed tens of thousands in 1918.

More than how to find money, how fast to find and deploy money is the need of the hour. The caveat, with which Jagdhari began his pandemic guide, will reflect the uncertainties of dealing with Covid-19. "Multiple views must be sought and collated as no person alive on this planet has ever seen a pathogen of this nature or a pandemic at this scale. There are no models or scenarios that have ever been prepared to deal with the economic and business outcomes from this type of a pandemic and there are no empirical models or data time series that will work in the current scenario". Finally, "outcomes will vary widely between nations and regions, and within different parts of the same nation based on the policies chosen, and based on the policies and their execution".

A stimulus is a certainty. All we need to see is which model India will prefer to fund it.

@joecmathew; EKumarSharma

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