The critics are trying to get Modi to cut the branch he is sitting on.
Their frustration is over his refusal to oblige them by committing economic hara kiri.
An orchestrated chorus of economic 'experts' and opposition parties, not least the Congress party under Rahul Gandhi, has been demanding huge dollops of cash handouts to the poor, and a massive economic stimulus that India cannot afford.
While the critics are right to point out that the 'Rs 20 lakh crore' economic package announced by the Narendra Modi government is not exactly an immediate stimulant for the economy, in demanding that the government should make mind-boggling amounts available for the stimulus, if needed by monetising the fiscal deficit (ie, printing money by borrowing from the Reserve Bank of India directly), it is quite obvious that they are setting up the government for failure.
Some of the critics may well be egging the government to keep spending like there is no tomorrow precisely because they understand fiscal economics: excess spending now will mean severe belt-tightening in the coming years, which means by the time Modi heads for the 2024 elections or some of the important state elections earlier, National Democratic Alliance (NDA) will be in the same mess that United Progressive Alliance-1(UPA-1) landed India in in 2004-2011.
They want Modi to repeat the mistakes of the UPA — high spending, excess borrowings, and high stimulus packages even when they were not needed — so that it will trap itself in an economic downturn again by 2022-2024.
For those who are unaware of what the UPA did, here is a brief primer: the UPA offered excise and service tax cuts after the global financial crisis, but what nobody realises is that the Manmohan Singh government was running a huge covert stimulus programme well before the crisis hit India in late 2008, even when the economy was booming.
Here is a partial list of the covert stimuluses run by the UPA in its first term, which set it up for failure in the second term.
One, through its 10-year term, the UPA gave out Rs 8.4 lakh crore in petro-goods subsidies, roughly 1 per cent of gross domestic product (GDP) every year.
This stimulus was given even in the grow-grow years of 2004-2008, when the economy and tax revenues were zooming for both Centre and states. Even assuming half the subsidies were intended for the poor, the remaining half — more than Rs 4 lakh crore — was a general stimulus.
Two, the working of the Fiscal Responsibility and Budget Management Act was reformulated thrice — in 2004, 2008, and in 2012 — just to accommodate the UPA’s spending desires.
Three, the launch of the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) scheme from 2006, promising 100 days of work for one member in each rural family, set a floor under wages, thus boosting incomes and spending power. But not real jobs.
Four, after the Lehman crisis, the UPA offered a tax stimulus which cost the exchequer Rs 1.8 lakh crore over three years.
Five, fiscal bonanzas — like the Rs 1.06 lakh crore raised at the 3G and broadband wireless auctions of 2010 — were simply squandered in subsidies. A subsidy is essentially a stimulus when given to the undeserving.
Six, a farm loan waiver in 2008, costing over Rs 60,000 crore, set the tone for future misadventures in all states. Modi resisted calls to waive farm loans, but various state governments did not. After the Uttar Pradesh loan waiver of 2017, it was a free-for-all everywhere in loan waivers. Net result: states do not today have fiscal space to meet even essential expenditures.
Seven, banks were urged to hold loan melas for funding infrastructure in 2006-2008, and this loan-led stimulus ultimately resulted in the bad loans crisis of 2014-2019. It also led to huge inflation.
On the plus side, it must be said that UPA policies led to high growth based on steroids, and millions were lifted out of poverty. The cost was paid by the economy as a whole, as growth crashed after 2011-2012.
Now contrast this record with what thinking economists are already saying about what kind of stimulus the economy needs now.
Ruchir Sharma, Morgan Stanley’s emerging markets investment strategist, when asked about an Indian stimulus, had this to say in a recent interview at the Indian Today eConclave:
As far as the fiscal space of the Indian government is concerned, the global fiscal stimulus at the moment is about 4 percent of GDP. In emerging markets, it has been much less (about half). In India, it has been just over 1 percent of GDP. India does not have the kind of fiscal room for more. We came into this situation with a large fiscal deficit. We cannot get out of this by printing money to stimulate the economy. India’s public debt as a share of its economy is over 70 percent and could get as high as 80 percent by next year. Research shows when debt is of that level, borrowing costs rise very sharply. Across the world interest rates have fallen. In India’s case that has not happened. If we print more money we could have a serious loss of confidence.
Raghuram Rajan, no friend of the NDA or Modi, said in a recent online conversation with Rahul Gandhi, that a relatively modest sum of Rs 65,000 crore to help the poor would be fine. He said:
Our GDP is ₹200 lakh crore, and out of that ₹65,000 crore is not a huge amount. So, we can do it. If this is for the poor and to save their lives and livelihood, we must do it.
Our capacities and resources are limited. Our fiscal resources are more limited than the West. What we need to do is to decide how we keep this economy together. When we reopen, is it sort of able to walk off the sick bed and not be dead at that point?
If one were to look at the fiscal spends already committed by the Modi government, including the Rs 40,000 crore increase in MGNREGA outlays, the free foodgrain given for six months to the poor and needy, the Rs 25,000-Rs 30,000 crore disbursed to farmers, old age pensioners, and women holding Jan Dhan accounts, the money handed out to registered construction workers, the Provident Fund subventions offered to employers and employees, and free gas cylinders to Ujjwala beneficiaries, we may already be breaching Rajan’s Rs 65,000 crore amount.
This does not mean the stimulus package is done and dusted, but can one give tax cuts on products to stimulate demand when the economy is in lockdown? When very little is being produced by way of goods and services beyond essentials, which anyway enjoy concessional or tax-free status, how will a stimulus help now? It has to come later.
It is difficult to escape the conclusion that all the exhortations to spend, spend and spend are little more than an effort to stampede the Modi government into taking rash decisions that will be impossible to pay off without sharp cuts in public spending in the coming years.
The critics are trying to get Modi to cut the branch he is sitting on. Their frustration is over his refusal to oblige them by committing economic hara kiri.