Modi’s 20 lakh crore figure seems pointless. Will Loans and Liquidity Sufficient to Save India?

After almost 50 days of one of the world’s strictest blockades to combat Covid-19, during which the Indian economy went into free fall, Prime Minister Narendra Modi announced an economic package that would put the country back on its feet and would make it self-sufficient. .

To Modi’s most ardent fans, the narrative logic that followed seemed to make sense: Within 20 minutes of the 20th hour of the day, Modi announced that his government would offer a cheap package of Rs 20 lakh crore. It was, he declared, “20 lakh crore by 2020.”

However, Modi did not offer details of the economic package in his speech. It was left to the Minister of Finance, Nirmala Sitharaman, to provide confusing information through “ad stretches” spread over several days.

No explanation was given as to why the announcements could not be made in a day, or why Sitharaman told reporters on the first day that they would have to wait until the last announcement to get an account of how the government will finance a Rs 20 lakh. crore package.

After two days of announcements from the finance minister, it seems clear that the lakh rupee number of Rs 20 is essentially meaningless, a bit of narrative and mathematical juggling that amounts to little.

For one thing, the number includes liquidity announcements already made by the independent Reserve Bank of India. In an effort to ensure businesses have easy access to credit, the central bank moved in a big way in the past month to provide cheap money for banks to borrow. Its operations alone account for almost half of the Rs 20 lakh crore package that Modi referred to.

Few major economies would count the central bank’s liquidity operations as part of its post-closing reconstruction packages, so including this fact in Modi’s announcement was questionable from the start. Furthermore, as business journalist Vivek Kaul has pointed out, little of this money is being used to shore up the economy. Instead, he just parked at the central bank. Technically this reduces the package to Rs Rs 14.53 lakh crore.

Then there are the unreliable calculations.

Can the tax be deferred in a matter of months, as has happened with the discount on the tax deducted at source, as part of a government package since this does not actually reduce the tax rate? Can a reduction in the mandatory contribution rate of the Provident Fund (money that already belongs to it) count as public expenditure? If the government is offering an interest rate subsidy for mortgage loans, if the package calculations include only the amount the state spent on the subsidy, or the amount people are expected to spend on home loans?

After two days of announcements, the total amount of new real government spending appears to be between Rs 40,000 and Rs 50,000 crore. That is a small percentage of the established Rs 20 lakh crore figure.

This could reduce the impact on the fiscal deficit (which was already tattered before the Covid-19 crisis). But it also means that the government is simply not using the tools available to put money in the hands of the people.

Loans, liquidity and credit guarantees are helpful, as it is a late decision to offer food rations to those without ration cards. But will they be enough to lift the Indian economy out of this crisis? Or do they simply push government spending in the future, forcing the state to pick up the pieces if the lack of demand ends up pushing individuals and companies into insolvency?

When Modi announced the Rs 20 lakh crore package, he seemed to disagree with those in his government who had argued against “free lunches”. Instead, he gave hope that the government would announce big measures that offer cash transfers, income support, and fiscal stimulus of the kind that even Hawkish economists are asking for. Many analysts have even discovered ways the government can find the funds to pay for such crucial initiatives.

But the details suggest more of the same approach to economics that brought India to the ditch before Covid-19.

Sitharaman, who is slated to make more announcements and explain how the government will pay for his package, may still announce something important on the spending side to boost demand.

So far, however, it seems evident that the government has privileged the narrative (20 lakh crore at 20:20 by 2020) over a genuine effort to lift India out of the disaster.