Coronavirus Outbreak: For Fiscal Intervention To Be Effective, It Needs To Go Beyond Cash Transfer And Tax Breaks

There has been a recognition since the start of the Covid-19 crisis that at some point the world may require a direct fiscal intervention from successive governments.

This intervention should be coordinated, focussed and large enough to keep the global economy intact from the disruption caused by a shutdown.

At the same time, we needed monetary policy support to ensure adequate liquidity in the system.

Central bankers have acted fast on the monetary front with nearly 43 rate cuts in 2020 alone and now leading economies are announcing fiscal measures in the form of tax breaks, income support and other subsidies to address the problem at hand.

However, even as all central banks have recognised the need for aggressive measures, our central bank has been overly conservative.

Indeed, rate cuts may not address the crisis. However, it serves as an important signal and would have further aided the second round of LTROs to further lower the cost of capital.

However, what is done is done.

It is important to recognise that this is an unprecedented crisis that has brought economic activity to a standstill. Consequently, what is needed is bold and aggressive policy intervention.

There is consensus that a fiscal action is more appropriate. However, the focus has been on a direct cash transfer programme or plans for deferred tax payments along with several other suggestions that have emerged such as reduction in GST rates.

The key thing is to have a coherent policy response that is well thought and considers different scenarios that may emerge in the near future.

That is, we cannot afford to blow up a stimulus by acting in haste and any such effort must be focussed to generate the maximum possible impact on economic activity.

This is important as several experts have focussed solely on cash transfers which is indeed a potent policy intervention, but we must also ask just how much can cash transfers work in the event of a shutdown.

Sure, such transfers will alleviate the pain of a shutdown, but then, we must recognise that the objective behind the transfer is to solely alleviate the pain and may not have the desired impact on revival of consumption as a bulk of it may just go to meet financial liabilities such as rent, interest on past borrowings etc.

Nobody is denying the need for cash transfers, they are definitely needed. But can they be the sole solution to the problem we face at the moment?

Absolutely not. We need to recognise the scale of the challenge that lies ahead of us and consider the different scenarios that may play out in future.

Effective policies are always those that can address the problem and come with a sense of credibility.

Therefore, for a fiscal intervention to be effective, it needs to go beyond just a cash transfer programme and accommodate tax breaks along with deferred payments.

Moreover, we may need to announce sector-specific stimulus measures within the next few weeks to prevent layoffs and help them get back on their feet once the Covid crisis ends.

Given these circumstances, what we broadly need is not one stimulus package but rather three of them that help address different parts of the problem.

The first could focus on mitigating the economic costs while the second could focus on averting a situation of massive layoffs and the third focuses on rebuilding sectors of our economy as quickly as possible so that we go back to a more normal situation.

The timeline for these packages can be best left to the judgment of the policymakers but a clear policy plan will help reduce uncertainty.

Therefore, while direct fiscal action is needed, it would be better if the appropriate action is in the form of a well-thought coherent policy response rather than some of the fiscal interventions that have been announced by various governments.

We must recognise that we do not have the luxury of excessive resources that some of our developed counterparts have and, therefore, we must make a conscious attempt to efficiently utilise the stimulus.

These are unprecedented times and indeed, there are no clear answers but one hopes that the government will be able to find one sooner, rather than later.