Only one word/phrase could describe this year, ‘annus horribilis’- the year of horrors. From riots, protests, economic recession to a deadly pandemic, there has been no respite.
In January, news started streaming in that the city of Wuhan, in the Hubei province of China, has been put under strict lockdown. The reason for such a punitive measure was the rapid spread of Covid19 –an infectious disease for which no known cure or vaccine exists. As of June 1, the total number of reported Covid19 cases exceed 6 million, globally, with over 350,000 fatalities recorded.
In India, the flares of the February riots and the bitterness of the NRC protests hadn’t died out when the catastrophe of coronavirus struck. The Modi government dawdled and dithered for the better part of February and March, in fact, the Indian parliament was in session up until the later part of March, with the Speaker of the Upper House of Parliament even cracking a joke or two about Covid19. The jocular nature notwithstanding, the ruling party was dead serious in toppling the opposition government in Madhya Pradesh at the height of the pandemic. Precious time and institutional headspace were devoted to priorities that could otherwise have waited. Precedence should have been given to preparing the country to tackle the public health emergency, rather the state capacity was indulged elsewhere. Well the people had spoken in May 2019, and people’s voice is god’s voice, and God is infallible, isn’t he?
The Lockdown
For a country like India which spends less than 1.5% on health, as a percentage of GDP, which is even lower than countries like Sri Lanka, Bhutan, and Indonesia, a pandemic was the perfect storm. Shortage of hospital beds, ventilators, and doctors- the litany of scarcity is just too long. The only sensible move to alleviate, if not eradicate, the effects of the pandemic was to call for a countrywide lockdown. But sense (logic) without sensibility (emotion), especially in a democracy is a recipe for misgovernance.
On March 24, Prime Minister Modi appeared on national television to declare a nationwide lockdown. Much like demonetization, an underappreciated masterstroke, this lockdown wasn’t a well thought out step. The hardest hit by this lockdown were the interstate migrants who were given a 4- hour notice to make arrangements for their sustenance, given most of the migrants were daily wage earners this was a bolt from the blue, even Sri Lanka, Bangladesh gave 4 days for their citizens to make arrangements for the lockdown.
These migrants who comfort our urban spaces, eke out a very precarious existence. They have no social security, no health insurance, tough employers, and an indifferent government to contend with. According to estimates, there are 65 million interstate migrants in India, with 54 districts contributing to 50% of the migrant flow. Most of these districts fall in the states of Bihar and Uttar Pradesh.
With their livelihoods suspended and no arrangements to ferry the migrants’ home, the most gut- wrenching exodus began. Both young and old started their trudge home, some by foot and some lucky few on a bicycle. En route, they were met with hostile state police forces, while battling unforgiving summer heat and hunger. A young man walked 1500 kilometers from Gujarat to his village in Uttar Pradesh only to die in quarantine. Stories such as these are legion. The self-inflicted humanitarian disaster could have been avoided had the government taken heed of the hardworking, but faceless migrant.
The fitful palliative – the relief package
When it became clear that the spread of Covid19 was going to deliver a crushing demand and supply shock, governments and central banks around the world swung into action. With memories of 2008 Global Financial Crises (GFC) still afresh, in which the global economy briefly glanced at the abyss, policymakers made sure that the world doesn’t descend into a severe depression. The US Federal Reserve slashed the federal fund rate from 1.5% to 0; the US government announced a fiscal package of around 5 trillion dollars, as a part of the package Americans earning less than 99,000 dollars per year were entitled to direct payment of 1200 dollars. Policymakers from other parts of the world- the UK, Japan, and the European Union- followed suit in cutting headline rates, providing liquidity to credit and financial markets, and delivering a fiscal stimulus to shore up aggregate demand.
With the draconian lockdown coming into effect on March 24, the unintended, yet disastrous, consequences of the same started playing out, the Modi government announced the first tranche of its relief package on March 26. The key highlights of the package were: 500 rupees per month would be deposited into the ‘Jan Dhan’ accounts of 204 million women, 2000 rupees would be transferred to farmers under ‘PM Kisan Yojana’, and 5kg of rice and 1kg of pulses would be distributed per month for three months to the poor. The cost to the exchequer for the first tranche came to 1.7 lakh crore.
How impactful was the first tranche in mitigating the effects of the lockdown, is a question that would be answered in the fullness of time. What did happen was: 122 million jobs were lost in April, according to the Centre for Monitoring the Indian Economy (CMIE); the MSME sector, which employs 120 million people, contributes to 45% of the exports and 30% of GDP, was shut down; apart from the sectors catering to essential needs, most of the economy went into a deep freeze.
The Reserve Bank of India (RBI) to its credit utilized all the tools within it remit to arrest the economic slide. The RBI slashed the repo rate by 115 bps, which was over and above the 135 bps rate cut delivered last year by the Monetary Policy Committee (MPC); cash reserve ratio and statutory liquidity ratio requirements were slashed to enhance liquidity in the banking system, also Long Term Repo operations (LTRO) were conducted to provide additional liquidity; further, a 3 month moratorium was provided on working capital loans, housing loans, and terms loans, in order to avoid a new wave of non-performing loans. These stimulus measures by the RBI are pegged at 8 lakh crore.
On May 12, PM Modi again appeared on national television, expressed his pain on the unfolding migrant crises and announced a bountiful relief package of 20 lakh crore, along with game-changing reforms which were to be unveiled by the Finance Minister, Nirmala Sitharaman. The theme for this round of reforms was ‘AATMNIRBHAR’ (self-reliance). The FM over the course of five days gave out the details of the relief package and the big bang reforms.
At the end of five days, it became clear that the government had engaged in a sleight of hand. Of the 20 lakh crore, 8 lakh crore infused by the RBI into the financial system was counted as a part of the package. As it stands, 85% of the 20 lakh crore went towards liquidity and credit enhancement, and 15% comes from direct budgetary support. The game changing reforms were many but those related to the agricultural sector were termed as bold and daring. One of the government’s core economic advisors highlighted that we are doing away with extractive systems which were put in place by Alauddin Khilji to exploit the Indian farmer and enrich Turkic nobility.
Not to be a ‘Doubting Thomas’, but the devil always lies in the details. Most commentators, like the gung- ho economic advisor, have singled out the following decisions as epoch making: to amend Essential Commodities Act; a national law for agricultural markets; and a legal framework to foster contract farming. Under the current law, ‘agriculture’ and ‘markets’ are state subjects, even though under article 301, central government has the legal mandate to ensure that trade within the country is free of barriers. Through the Agricultural Produce Marketing Committee (APMC) Acts, agricultural trade is regulated within states. These acts specify the commodities that can be traded and commissions that can be charged by middlemen, however, there is significant variance in the scope and stringency of these acts across states. This leads to a fragmented national market. The current reforms aim to get the farmer a better price for his produce, while minimizing waste and inefficiency in the value chain; presently, the farmer gets no more than 25-50% of wholesale prices.
This isn’t the first time the central government is pushing for agricultural reforms, rather previous reforms haven’t been able to have the desired transformative impact. In 2016, National Agricultural Market (e-NAM) was launched as an online platform for farmers, traders, buyers to trade commodities. However, e-NAM didn’t have the desired impact on the ground. Bihar had abolished APMC act in 2006 with the same aim of maximizing farmer income, again there hasn’t been much change on the ground. The marginal farmer has a very convoluted relationship with the middleman who buys his produce; the farmer relies upon him for storage, transport, and even credit. It remains to be seen how the government tackles these challenges.
Bridge to nowhere
The Economic Survey, published by the Ministry of Finance, admitted ‘that the dark clouds hovering over the Indian economy are unlikely to go away in 2019,’ further it pegged India to grow at 5%- slowest in 11 years. That 5% growth rate for the current fiscal would be an over achievement. According to Nomura and Goldman Sachs, the Indian economy might contract this financial year.
Heading into the 2008 GFC, the banking system was in relatively good health, with Gross Net Performing Assets (GNPA) at 2.4%, while the same number stands at 9.3% in 2020; Corporate profits stood at 7.8% of the GDP, while they languish at 3-4% today; Fiscal deficit in 2008 stood at 2.5%, presently it stands at 4.6%, with significant deterioration looming large. MSME sector has been the victim of one government bungling after the other, from demonetization to GST implementation this sector has been the primary victim of misgovernment. Further we don’t know how the current thrust of ‘AATMNIRBHARTA’ (self-reliance) would turn out, but if ‘Make in India’ and ‘Startup India’ is any guide then brace yourself.
The FM thinks we cannot afford to splurge to end the slowdown. What happens if aggregate demand doesn’t revive anytime soon? Given India’s growth model is based on boosting internal consumption, and the thrust to shift that model to become export-led has run into problems, with land acquisition and labor being prime culprits, any delay in stimulating consumption will only deepen the hole the economy finds itself in.
If the current trend in governance stands, the Indian economy’s fate could be that of Robert Frost’s
About the author
- Kumar Somya Pandey
Kumar is an investor. He is an avid reader, with interests in history, politics, economics, technology and business. He holds a Masters in Public Administration from Columbia University and Masters in Finance and Economics from Warwick Business School.
