A neo-Keynesian move by the Centre could have hitched up falling demand to rescue the ailing economy
Fighting COVID-19 has brought out renewed demands for a stronger health safety net, combined with social and economic security. Both require adequate revenue resources, employment and income generation. Only a sound macro economic policy of demand-boosting public expenditure, progressive taxation and greater investment in all the three sectors of the economy can fulfill these requirements. Visibly, fiscal management by rate cut, devaluation of the Rupee against the US Dollar, augmentation of Government finances by pulling surplus funds from the RBI, could not create elbow room. Reluctantly, not more than one per cent of the GDP for boosting the aggregate demand for the large sections of poor, casual, unemployed and migrant workers in informal and formal sectors, is ramped up through all these measures. Can this health emergency slide into a stiff economic and political emergency? Seemingly, the Government is pushing for the long haul without a clear revival plan post-lockdown. With the Rupee being at an all-time low, cutting the reverse repo rate by the RBI does not unfetter the parked up Rs 6 billion of banking institutions towards enhanced credit demand, though arguably the cost of credit has been brought down.
The latest monetary stimuli worth Rs 50,000 crore for the purpose of borrowing by small, medium and rural enterprises cannot by itself pump in blood in the distressed farm and MSME sectors, unless promoted by suitably-calculated tax and interest exemptions. On the other side, the stock market continues to plummet as more foreign investors offload their stocks. Frugal monetary stimuli alone are not able to scale up the freefall by an aggressive redemption on the demand side. In the lockdown-induced gloom, sharp fall in aggregate demand makes the factor market quiver for fresh capital reinvestments. As long as such uncertainties persist, it is unlikely that monetary stimuli can lead the economy to revival. Like the first package worth Rs 1.7 lakh crore for the poor could not invigorate the level of aggregate demand that can create confidence in the factor market, the second one meant for the industry and service sector certainly missed the bull’s eye. Given these ducks and drakes in reinforcing the “animal spirit” in the economy, a continued lockdown would result in the freefall of economic indices.
This brings us to the question, whether the pandemic has led the Centre to create an emergency chest that otherwise calculably would have been dictated by an impending financial emergency? Given the Centre’s overall fund position and the dwindling health of the exchequer, it is not difficult to understand the drive for collecting more money into brand new funds like PM Cares. Instead of borrowings from the market, the PM Cares Fund gives the Centre the discretionary power of funding “select” States in such terms that are purely driven by crisis response. Extraction of money from constituency development funds meant for MPs is another drastic measure for mopping up money to fight COVID. Is the Centre getting weary of deficits in the public exchequer that might slow its response towards COVID testing and treatment?
The recent pump priming by printing currency worth Rs 1.2 lakh crore is a response to the increasing demand for cash during the pandemic. The point is, desperate times needing desperate monetary measures cannot avert the macro economic risk of capital flight from the market, further weakening any recovery that is already stressed by lockdown-induced pangs. The recent discussion on the projected growth of the GDP in the current fiscal between 1.8 to 2.4 per cent, to doomsday prediction of negative growth, spurred intense fear in business circles.
The initiatives taken by the RBI have had limited impact as the Centre cannot back it up from its own resources. When market borrowings become cheaper, demand for cash is rising and yet the credit market is shrinking with stocks being sold. It is a general risk perception that is creating an unmediated and internalised sense of crisis in asset management, spurring flight of capital. In effect, India’s stable foreign reserve cannot offset the trading imbalances created by various risk currencies losing buoyancy, sparking off a chain of morbid response in the product and factor markets across the country. The fall in crude prices saves India’s foreign reserve but at the same time, the cost of import of many essential drugs and manufacturing components dents the apparent confidence of holding of reserves. To unleash the animal spirit, a neo-Keynesian move by the Centre could have hitched up falling demand to rescue the economy. If the Centre is compelled to continue the lockdown at a massive economic and social cost, what are its political spin-offs? Is it a suspension of many of our fundamental rights that enable citizens to make both ends meet, or is it just a short-term squeeze? Seemingly, it will be difficult to restore the lost rights in practical terms and the effect of such a loss would rob institutions of democracy the precious human freedom. A financial emergency, then, is a political tool to restrict not only citizens’ freedom and capability but to impose norms of behaviour on the public that a slowing economy forces upon the Government.
The paradox is that a falling economy requires greater manpower participation and action in production, while restrictions imposed on liberty of individuals and enhanced exploitation of workers would tire the system out by lockdown-induced quirky lockouts. Hence the animal power of the economy needs to be released in full, which might correspondingly boost up antibody and herd immunity. This would contain COVID in the short term and revitalise the economy in the long term.
(The writer is a Shillong-based philosopher and political analyst)
