Rs.20 Lakhs Crore - All Sound and No Song

'FM showing how "big" is the package.'

On May 12, when Prime Minister Narendra Modi, addressed the nation, in his 33 minutes long speech, at the last 3 minutes, he announced that the Government will come up with a Rs. 20 lakh crore "Package". This "package" which amounts to 10% of India's GDP, was intended to boost the economy and act as the stimulus to the acutely depleting financial and social situation due to unprecedented hardships effected by the 2 months Lockdown fighting against Covid 19.

While we are at Lockdown 4.0 since May 18 or we could term it as Openup 1.0, around 1 lakh in India are already Covid infected and more than 3000 died due to it. The numbers are rapidly increasing each day. But, inspite of all this, when that "Rs.20 lakh crore" was announced, we all stood up with good anticipation and efficacious expectation. Because what announced till then was, the second biggest Covid stimulus package in the entire world, only next to US in terms of percentage of country's GDP. 

But what followed next, was a 5 day Nirmala Sitharaman serial - and almost all hopes dashed. Ending as all Sound, and no song.

At this critical juncture common-folks are in need of cash. But what they got was loan guarantee. Around Rs.8 lakh crore from RBI and around Rs.13 lakh crore from government guarantees. While these measures are good in a medium term perspective, what we needed was a short-term direct help.

Let us see some facts in micro level around our life in last two months. We have a maid in our house who is unavailable due to lockdown, but we diligently paid her salary. Her other employers however refused to pay. Her husband works in a factory, and was not paid salary by his employer. They have six mouths to feed. My wife is a teacher of a franchisee school, working from home, and got her salary. But some of her other colleagues who are teachers of music, dance, art and crafts, sports were not paid. These teachers were not given any online teaching assignment by the school. My office is closed, so are others. So the nearby vendors who used to sell tea, snacks, lunch dabba, cigarettes, are all out of income. And there are millions such stories across the country. A prompt dole of cash was what they were looking forward to. But what they got was not much of cash support or direct relief for low income unemployed from the government till now.

There is nothing in the package for middle class. Middle class anyway always are the most neglected when it comes to government financial support. Pay cuts and job losses will prolong their negative consumption sentiment. 

Liquidity support and relaxation of Insolvency laws and NPAs will help small to medium businesses over time. But due to lack of demand, the current stress on them will continue to remain. 

Some reforms announced are good in a medium to long term effect. The new definitions of MSME, Airport and discom privatization, opening up of coal and mining sector, higher FDI in defence will help in the long run. But a stimulus which consists 70% of loan guarantee and liquity push, can never be termed a contingency package in context of current unprecedented financial emergency.

This package shows no road to directly boost job creation, nor any demand creation to prevent pulling down of economy. Consumers will remain to stay cautious.

In economics there is a term called 'Ricardo-Barro effect'. It is an economic theory that suggests that when a government tries to stimulate an economy by increasing debt-financed government spending, demand remains unchanged, because the public increases their saving to pay for expected future tax increases that will be used to pay off the debt ending up having a detrimental effect on the country's economic growth.