Updated: October 2, 2020 7:06:48 am
Minister of Finance, Nirmala Sitharaman. (Proceedings)
Speaking to The Indian Express on September 26, Union Finance Minister Nirmala Sitharaman said that she is open to “the need for more encouragement” and its moment.
That may not be much of a guarantee given the growing sense of unease in expert bodies, including the Prime Minister’s Economic Advisory Council, Niti Aayog and the office of the Chief Economic Adviser.
Several policy influencers in these agencies are puzzled by the central government’s reluctance to spend more now despite its unanimous view that a fiscal stimulus, sooner rather than later, will better position India to take advantage of the important reforms that are being pushed. in agriculture and work.
In at least four meetings that Prime Minister Narendra Modi chaired for 10 days between the end of June and the beginning of July, The Indian Express learned, members of its EAC, Niti Aayog and the CEA office, made presentations with the participation of senior officials in the PM Office, Ministry of Finance and Ministry of Commerce.
“There was almost unanimity of views on two aspects: i) fiscal expansion or increased spending, and ii) reforms in the financial sector, including the sale of shares in public sector banks. Key cabinet ministers were present, including Amit Shah, Nirmala Sitharaman, Piyush Goyal, Ravi Shankar Prasad and Gajendra Singh Shekhawat. The message was clear: Modi seemed to be building a political consensus within her cabinet on spending, ”said one of the people present at the meeting, who did not want to be named.
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Among the specific ideas presented to the political leadership and aimed at imparting a fiscal stimulus are: some type of wage subsidy to workers; rural housing: construction of more than a thousand houses in more than 700 districts of India, construction of 100-bed hospitals in blocks of districts that do not have one, and a six-month urban employment guarantee plan.
The key idea behind these proposals, the sources said, was to apply a countercyclical fiscal policy as the economy faces its worst recession with millions of jobs lost in the wake of the Covid-19 pandemic and the subsequent strict national shutdown.
“Infrastructure projects such as housing and health will have a significant multiplier effect and will help generate demand,” said another participant, who also did not want to be identified.
The Indian Express spoke with at least a dozen participants, including cabinet ministers, present at those meetings in June-July. Subsequently, too, the Prime Minister and his office have met separately with various stakeholders, and their input has been forwarded to the Ministry of Finance for further action.
Speaking to The Indian Express last Saturday, Finance Minister Nirmala Sitharam said there was no aversion to spending and that many of the announced measures, including those of the AtmaNirbhar package, were still underway.
To a specific question about additional spending, he said: “I am not closed (to) the option … by doing all this, we have remained open to the idea of … in case there is any need for more stimulus.
Although more than three months have passed, there has been no action. “What we did was relief, what we need is encouragement,” said a policy expert, who also declined to be named.
What worries government advisers is that the window to implement a countercyclical policy in 2020-21 is closing. “The loan schedule for the second half announced on Wednesday has not changed; the government plans to stick to its objective, ”said the expert, noting that this was an indicator of the Center’s aversion to increasing spending.
Think tanks and think tanks that advise the government are concerned that keeping a clenched fist could result in the economy ending with a sharper-than-expected contraction this year.
Another concern is that India may not be in an optimal position to switch to a higher growth trajectory once the Covid-19 threat subsides. “The 8 percent growth target may remain illusory … we should be happy with 5 percent GDP growth a year,” said one expert.
Senior finance ministry officials said the stimulus was still being discussed. One official said: “We will spend; It may not be a great encouragement, but it will give us the most bang for the buck. The non-salaried middle class and small businesses that have been severely affected, but have not received any support so far, can be beneficiaries of this.
Another official said the various proposals made by the experts were still being discussed. “For example, if we consider the wage subsidy, how we distribute it, to whom we distribute it, to workers in the formal sector or also to the informal… These require careful deliberation,” said the official.
A section of officials is also optimistic that production and capacity utilization in the manufacturing sector has more or less reached pre-Covid-19 levels, making them ponder whether a major stimulus was really required. “The economy is recovering faster. Why do we need a stimulus? In addition, fiscal space is also limited… Rating agencies are already issuing veiled warnings, ”said the official.
But policy advisers point out that growth itself acts as an antidote and ensures medium- and long-term debt sustainability when growth rates are higher than interest rates. In a presentation to the PMO, they have pointed out that given the current crisis that has caused a collapse in demand, focusing too much on the fiscal deficit at the cost of growth can be shortsighted. This is especially true for countries like India, which have high growth potential (7 to 8 percent).
Even NK Singh, chairman of the 15th Finance Committee, told The Indian Express in a recent interview that in times of such stress, the framework for determining the stage of loans, fiscal deficit targets, and debt consolidation should be something different.
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