The need for 'maximum government'

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The need for 'maximum government'

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• Job creation as part of Stimulus: The Finance Minister has added job creation in the stimulus announced in Nov. 2020, in acceptance of the fact that unemployment rates are quite high. So hard economic facts are being accepted now.
• Minimum govt.: It's good that the problem is identified, but what's problematic is that the govt. still believes in 'minimum government' idea, when more fiscal stimulus is the only way out. India is today facing the twin whammy of economic crisis coupled with the pandemic crisis.
• Core message from GoI: In all the three Atmanirbhar Bharat packages 1.0, 2.0 and 3.0, the basic message to citizens and enterprises is that "if you are willing to do this, then we will give you that". The ball is put in the court of the already suffering, rather than the govt. taking charge of driving the economy out of danger. 

1. Atmanirbhar 1.0 - Total size was Rs.20.9 trillion, of which Rs.17.9 tr was about credit guarantees and liquidity easing. That remained so in the 2.0 and 3.0 versions as well.
2. The idea is that the business sector will start the virtuous cycle of investment and induce households to increase consumption. Evidence is to the contrary.

• Nature of corporate investment: It is limited by sales volumes and credit. If these dry up, then investment goes down, and revival needs a revival in both. So low sales means factories are running below capacity, thereby killing the incentive to add more capacity. Hence, lower interest rates or easier access to credit mean nothing. Larger corporates can still somehow manage, but the MSMEs cannot. They will remain wary of fresh loans.
• Behaviour of households: As present incomes dwindle, and future incomes get uncertain, general tendency would be to avoid taking more consumer or housing loans, even at lower rates. And when there are takers, Banks remain extremely wary of issuing credit due to the NPA overhang. The banks have not been passing on cuts in RBI policy rates, in order to maintain a larger margin to cover up for NPA losses.
• Two observations: First - banks are not extending credit. And Second - corporate sector's current assets are rising, indicating good liquidity with it. So overall, the various new credit lines, guarantees and low cost loans have little impact on demand revival in economy. The three stimulus pacakges are actually just on paper, and hence the economy is paying a big price.
• What should be done:

1. The FRBM must be kept in abeyance, for Centre and STates, and an immediate fiscal stimulus of Rs.10 lakh crore must be injected right away
2. Borrow from the markets or monetise the deficit
3. Stimulus must include free ration and essentials (oil, soap, cooking gas) for six months, cash transfers till jobs are back, urban job guarantee law.
4. New spending on public health infrastructure where services are provided to the public actually (not just insurance facility)
5. a comprehensive Green Deal to tackle emissions

• An opportunity: The crisis is a chance to rethink India's health, economic and climate policies. If missed today, it'll be a price for coming generations to pay.

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