FM, Fiscal Policy, And The Indian Economy

FM, Fiscal Policy, And The Indian Economy

by V. Anantha Nageswaran - Monday, October 5, 2020 01:00 PM IST
FM, Fiscal Policy, And The Indian Economy
Prime Minister Narendra Modi with Finance Minister Nirmala Sitharaman.
  • In the larger context of the Indian economy, and given some signs of recovery, how do we look at what the Finance Minister said in recent interviews given to media outlets?

India’s Finance Minister has given a series of interviews — Indian Express, Hindustan Times, Economic Times, Swarajya and the Business Standard.

I recommend, in particular, the interviews to the Indian Express, Economic Times and Swarajya, perhaps, in that order.

The questions posed by IE journalists/interviewers were incisive.

She did not flinch from answering them. She accepted the challenge and her answers on the politics of farm sector reforms were equally incisive. Well worth a read. She also has compelling arguments on the oft-repeated charges of intolerance and suppression of dissent.

Also, this point on the Emergency Liquidity Guarantee facility offered to small enterprises has been extended.

I did not know that:

Take the example of this emergency liquidity guarantee. We have expanded its scope from MSMEs now to cover proprietorships, partnerships, and even individual professionals. So, what was announced (across the board) has expanded in its scope and scale.

The point she makes on the critics who have charged that all critics of the government and the PM are called anti-national, was feisty:

Let us understand: who’s calling anybody an anti-national? Has any one of us done it? No. People out there can do it. Calling anyone anti-national is wrong? Yes, it is wrong. But what was the other way around? We don’t believe in our systems, we go outside to achieve our norms, you did that.
We have not written to any country saying please stop so and so from coming. We have not written to any country saying, "Oh My God, I’m scared to live here, I want to get out the moment X gets elected. Or the moment X gets elected, I will run away, my wife will run away, we don’t want to live in this country…Who’s uttered these kinds of things, they may not be anti-national, but they did enough, because some people who are great icons for the youth, when they say these sort of things, today you also have the some mocking them and saying: Oh, why didn’t you go, X has got elected? Haven’t you gone?

Her interview with the Economic Times stood out for the candid expression of ‘Dharam Sankat’ on the claim that the Enforcement Directorate has on some of the assets of Bhushan Steel that have been since acquired.

She understands the importance and sanctity of the Insolvency process and she is also mindful of the claims of ED. You can find the interview here.

The interview with Sukumar of the Hindustan Times mentions the national security implications of what is happening in Ladakh and that the influence it has on the fiscal policy decisions of the government should not be lost on anyone.

One particular exchange in the interview with Swarajya was interesting for the economics teacher in me:

"There is a feeling that most of the package is about easing lending norms, not putting money in people’s pockets. How will demand improve? When can we expect a more direct demand stimulus package?"

Is it so watertight a compartment between ‘supply side’ and ‘demand side’? It is very well to say that this is supply side and that is demand side, but the way in which we tailored the schemes was aimed at helping industry, both small and big, to start up once the lockdown is lifted. Whether it is to pay wages or electricity bills or to buy raw materials, or for a trader to replenish his stock, once money is spent on these things does it not mean money is going for demand creation?
While I appreciate the fact that more can be done, I do not think that the government has confined itself to help only one side of the story. We expect the flow from one to the other. I can clearly see that happening. For example, through NABARD and regional rural banks, more rural credit is being pushed. A sum of Rs 90,000 crore has been pumped into the system and is making a difference to the rural economy. Hence a clear-cut division of supply and demand side (stimulus) is not necessarily valid.

I found myself agreeing with her on that response. In the ‘National Income Identity’, we have Y=C+I+G+(X-M) where 'I' is investment spending and it is part of the aggregate demand function.

But, some forms of investment do boost potential growth and hence enhance aggregate supply.

Check out the two posts in here and here.

On whether the government should be doing more on stimulating economic growth with additional fiscal spending, a friend shared this recent IE article that has appeared after their interview with the Finance Minister.

My view is that the government can do more and should do more. I have written about it here, here and here.

That said, I can also comfortably and, without fear of contradiction, concede the following:

(a) It is hard to figure how to and when. Easier to be wise in hindsight.
(b) It is hard to know if the positives would outweigh the negatives.
(c) I would concede that they have more information than we do on the security aspect.

With particular reference to (a) above, see the October 2020 NBER Digest. One of the papers (‘How Did US Consumers Use Their Stimulus Payments? (NBER Working Paper 27693‘) featured there examines how the stimulus cheques were spent or used by households in America thus:

The Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted on March 27, 2020, was designed to bolster household incomes and support consumer spending. It achieved the first goal, but had only a modest impact on consumer spending. Survey data on household behavior suggest that nearly 60 percent of the stimulus spending went to pay off debt or was saved. Of the roughly 40 percent that was spent on goods and services, consumers favored food and beauty products rather than large durables like cars or appliances. The averages mask considerable variation among households. Some 20 percent saved virtually all of their stimulus check; another 40 percent spent nearly all of it. Roughly 20 percent used most of their federal payment to reduce their debts.

Why didn’t Americans spend more? Olivier Coibion, Yuriy Gorodnichenko, and Michael Weber put forward two possible explanations.

One is that the pandemic-induced lockdown closed down so many businesses and recreational and travel options that recipients could not spend the whole transfer.

The other is that the law of diminishing returns kicked in. They find that the larger the stimulus check, the less likely recipients are to spend it.

The researchers say this suggests that there is a bound on how much stimulus can be generated through direct transfers to households, and that in the face of large crises, decision-makers may want to consider a broad range of policies targeting aggregate demand, with direct transfers being only a part of the fiscal policy response. [Link]

So, it is one thing to recommend stimulus. Recommendations and suggestions without responsibility and accountability for consequences are far easier.

No one knows what works and in what horizon and how much and the downsides.

Similarly, with respect to asset sale. It is easier for us to say that the government should monetise its assets. All fine and dandy, in theory.

But, when to sell, what to sell, at what price to sell and to whom are all fraught with complexity and consequences, especially by the three Cs far longer after one’s retirement.

The recent case of a CBI court re-opening the case of a hotel privatised during the first NDA government by Dr. Shourie is a case in point.

In principle, I have made the case too for higher government spending, for monetisation, et cetera but I respect the constraints the government faces and the issues it has to take into consideration.

Back to the interviews of the Finance Minister. It is very good that she reached out to so many outlets and shared her views on a range of topics.

The conversations were candid and we got a glimpse of her thinking on many issues, from politics to economics to security to personal response to the crisis, the ‘steep learning curve’ as Swarajya’s R. Jagannathan put it.

At least for now, she has been rewarded for her efforts. The E-Way Bills generated in September 2020 provides the strongest indication:

In what could be a big sign of revival of economic activities in the country, the month of September saw record e-way bill generation. Finance Secretary Ajay Bhushan Pandey today said e-way bills have hit a record high of 5.74 crore in September this year, which is 9.3 per cent more than those generated in the year-ago period. Last year in September, 5.24 crore e-way bills were generated….”On 30 September 2020, almost 26.19 lakh e-way bills were generated which is the highest ever count so far in a single day. Earlier on 29 February this year, 25.19 lakh e-way bills were generated, while on 31 January, around 24.74 lakh e-way bills were generated,” he added.

We will take this one too, even though all the caveats are well-known and noted:

After six months of continuous fall, India’s goods exports posted a 5.27 per cent growth in September 2020 (year-on-year) to $27.4 billion, with crucial sectors such as readymade garments, engineering goods, petroleum products, pharmaceuticals and carpets on an upswing.

This is from the monthly Markit Manufacturing PMI surveys:

The headline seasonally adjusted IHS Markit India Manufacturing Purchasing Managers’ Index® (PMI®) increased from 52.0 in August to 56.8 in September, signalling back-to-back improvements in the health of the sector. Moreover, the latest reading was the highest in over eight-and-a-half years. Amid reports of loosened coronavirus disease 2019 (COVID-19) restrictions and higher demand, Indian manufacturers lifted output for the second straight month in September. The increase was sharp and the third-quickest in the history of the survey.

Little-known Sales Managers’ index (SMI) improved to 44.3 in September from 39.5 in July and 42.2 in August 2020. [Link]. Full details are not available except to subscribers and I am not one.

The monsoon was the third best in 30 years:

All-India seasonal rainfall this year at 109 per cent of the long-period average (LPA) has been the third-highest in the last 30 years after 112 per cent in 1994 and 110 per cent in 2019, as per the salient features of season brought out by the India Meteorological Department (IMD) on Thursday.

Whether they sustain or not — because there are plenty of global uncertainties both in politics and pandemics and in pandemics-politics — these are definitely greenshoots.

(This piece was originally published here and is reproduced after permission)

V. Anantha Nageswaran has jointly authored, ‘Can India grow?’ and ‘The Rise of Finance:Causes, Consequences and Cures’

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