Economic package announced by GoI

in context of COVID-19:
TOO LITTLE, TOO LATE?

Abhijit Kumar Sahani : ECON008

Anandarup Sengupta : ECON017
Subham Ghosh : ECON024
Suchetan Banerjee : ECON028
Amit Kumar Das: ECON035
Parshwonath Dey : ECON040
Soham Mukherjee : ECON046
 INTRODUCTION

• The COVID-19 pandemic is a crisis like no other. It feels like a war, and in many ways it is. People are
dying. Medical professionals are on the front lines. Those in essential services, food distribution, delivery,
and public utilities work overtime to support the effort. And then there are the hidden soldiers: those who
fight the epidemic confined in their homes, unable to fully contribute to production.
• In a war, massive spending on armaments stimulates economic activity and special provisions ensure
essential services. In this crisis, things are more complicated, but a common feature is an increased role
for the public sector.
• At the risk of oversimplifying, policy needs to distinguish two phases:
• Phase 1: The war. The epidemic is in full swing. To save people’s lives, mitigation measures are
severely curtailing economic activity. This may be expected to last at least one or two quarters.
• Phase 2: The post-war recovery. The epidemic will be under control with vaccines/drugs, partial herd
immunity, and continued but less disruptive containment measures. As restrictions are lifted, the
economy returns—perhaps haltingly—to normal functioning.
• The success of the pace of recovery will depend crucially on policies undertaken during the
crisis. If policies ensure that workers do not lose their jobs, renters and homeowners are not evicted,
companies avoid bankruptcy, and business and trade networks are preserved, the recovery will occur
sooner and more smoothly.
• This is a major challenge for advanced economies whose governments can easily finance an
extraordinary increase in expenditures even as their revenues are dropping. The challenge is even
greater for low-income and emerging economies that face capital flight like India.
Wartime policy measures:
• Unlike other economic downturns, the fall of aggregate output in this crisis is not only driven by
demand but also by supply; it is an unavoidable consequence of measures to limit the spread of
the disease. The role of economic policy is hence not only to stimulate aggregate demand but also
aggregate supply. Rather, policy has three objectives.
o Guarantee the functioning of essential sectors. Resources for COVID-19 testing and treatment must
be boosted. Regular health care, food production and distribution, essential infrastructure, and utilities
must be maintained. It may even involve intrusive actions by the government to provide key supplies
through recourse to wartime powers with prioritization of public contracts for critical inputs and final
goods, conversion of industries, or selective nationalizations. Rationing, price controls, and rules
against hoarding may also be warranted in situations of extreme shortages.
o Provide enough resources for people hit by the crisis. Households who lose their income directly or
indirectly because of containment measures will need government support. Support should help people stay
at home while keeping their jobs (government-funded sick leave reduces movement of people, hence the risk
of contagion). Unemployment benefits should be expanded and extended. Cash transfers are needed to reach
the self-employed and those without jobs.
o Prevent excessive economic disruption. Policies need to safeguard the web of relations among workers and
employers, producers and consumers, lenders and borrowers, so that business can resume in earnest when the
medical emergency abates. Company closures would cause loss of organizational know-how and termination
of productive long-term projects. Disruptions in the financial sector would also amplify economic distress.
Governments need to provide exceptional support to private firms, including wage subsidies, with
appropriate conditions.
• Greater intervention by the public sector is justified by the emergency for as long as exceptional
circumstances persist, but must be provided in a transparent manner and with clear sunset clauses.
• Policies in support of households, businesses, and the financial sector will involve a mix of liquidity
measures (provision of credit, postponement of financial obligations) and solvency measures.
• Several tradeoffs will need to be managed. If transfers or subsidized loans are given to a large corporation,
they should be conditional on preserving jobs and limiting CEO compensation, dividends, and stock
repurchases.
• An intermediate option is for the government to take an equity stake in the firm. When liquidity
is the problem, credit by the central bank (through asset purchase programs) or other government
controlled financial intermediaries (through loans and guarantees) has proven effective in previous
crises.
• Many practical questions arise also in identifying and supporting hard-hit small- and medium-sized
enterprises or self-employed individuals. For these, direct transfers based on past tax payments
should be considered.
• These domestic policies need to be supported by maintaining international trade and
cooperation, which are essential to defeating the pandemic and maximizing the chances of a quick
recovery. Limiting the movement of people is necessary for containment. But countries must resist
the instinct of shutting down trade, especially for health-care items and the free exchange of
scientific information.

From shelter-in-place to recovery:

• Promoting the recovery will have its own challenges, including higher levels of public debt and
possibly new swaths of the economy under government control. But relative success in Phase 1
will ensure that economic policy can go back to its normal operation. Fiscal measures to boost
demand will become increasingly effective as more people are allowed to leave their homes and go
back to work.
• Interest rates and inflation were
projected to be low for most of the
countries before the pandemic.
Preventing major disruptions in
supply chains should avoid inflation
during the emergency and recovery
phases. If the measures to contain the
spread of the virus are successful, the
necessary increase in the public debt
ratio will have been sizable, but
interest rates and aggregate demand
are likely to remain low in the
recovery phase. Under those
circumstances, fiscal stimulus will be
appropriate and highly effective in
most economies. And this will
facilitate exit from the exceptional
measures introduced during the crisis.
• The economic impact of the 2019–20 coronavirus pandemic in India has been hugely
disruptive. World Bank and credit rating agencies have downgraded India's growth for fiscal
year 2021 with the lowest figures India has seen in three decades since India's economic
liberalization in the 1990s. However, the International Monetary Fund projection for India for
the financial year 2021-22 of 1.9% GDP growth is the highest among G-20 nations. Within a
month unemployment rose from 6.7% on 15 March to 26% on 19 April. During the lockdown, an
estimated 14 crore (140 million) people lost employment. More than 45% of households across the
nation have reported an income drop as compared to the previous year.
• The Indian economy is expected to lose over Rs 32,000 crore (US$4.5 billion) every day during the
first 21-days of complete lockdown which was declared following the coronavirus outbreak. Under
complete lockdown less than a quarter of India's $2.8 trillion economy is functional. Up to 53%
of businesses in the country will be significantly affected. Supply chains have been put under
stress with the lockdown restrictions in place; initially there was a lack of clarity in streamlining what
is an "essential" and what isn't. Those in the informal sectors and daily wage groups are the most at
risk. A large number of farmers around the country who grow perishables are also facing
uncertainty. Various businesses such as hotels and airlines are cutting salaries and laying off
employees. The live events industry has seen an estimated loss of Rs 3,000 crore (US$420 million).
 I S - L M A N A LY S I S

• It is clear that COVID-19 will cause a recession in the

economy. Output will drastically reduce and so we must
turn back to Keynesian Theory. Keynes had always
advocated the use of fiscal policy to increase output in
the short- run. However, fiscal policy alone may not
be able to increase output by the maximum extent
possible as depicted.
• From Figure 1, it is clear that the increase in income or
output(Y) is much smaller than the increase in
government spending(G). The increase in government
spending increases income which increases demand
for money, if money supply remains the same then
interest rate(i) will have to rise so as to keep the
money market in equilibrium. This rise in i causes Figure 1: Increase in government
expenditure shifts the IS curve to the right.
private investment to fall as investment is negatively
related to i. Hence, the equilibrium increase in Y is
less the equilibrium increases in G.
• From Figure 2, it is clear that the increase in
income or output(Y) is much smaller than the
increase in government spending(G). The increase
in government spending increases income which
increases demand for money, if money supply
remains the same then interest rate(i) will have to
rise so as to keep the money market in
equilibrium. This rise in i causes private
investment to fall as investment is negatively
related to i. Hence, the equilibrium increase in Y
is less the equilibrium increases in G.
• Hence, the combination of both monetary and
fiscal policies will help to recover the economy Figure 2: Increase in money supply shifts
from the shock of Covid-19. Therefore most of the the LM to the right, i remains the same.
economies (including India) have taken steps to
increase government expenditure and also to
increase liquidity (money supply) by cutting down
on policy rates.
 ECONOMIC POLICIES INTRODUCED IN
RESPONSE TO COVID-19
FISCAL POLICIES:
• Finance Minister Nirmala Sitharaman announced a fiscal package that is claimed to be worth Rs1 .7
lakh crore, constituting around 5% of the total public spending and 0.8% of the GDP. It is aimed at
guaranteeing access to food and cash for the poor and vulnerable sections.
• The government will increase its borrowing plan for the fiscal year 2020/21, which starts from April 1,
from the current planned gross borrowing of Rs 7.8 trillion.
• Govt. will frontload the PM-Kisan transfer by about four months. It involves an expenditure
of Rs17,500 crore out of the budgeted Rs 75,000 crore in Union Budget 2020–21.
• The Centre has announced cash transfer to Jan Dhan accounts held by women, it only covers half the
beneficiaries under Jan Dhan. The payment of Rs. 2,000 under PM Kisan is only front-loading the benefit
already set aside in the Budget.
• India is likely to agree to an economic stimulus package of more than Rs 1.7 trillion ($19.6 billion)
which is 0.8% and 5% of total public spending of the GDP, under the Pradhan Mantri Garib Kalyan
Yojana to fight a downturn in the country that is currently locked down to stem the spread of coronavirus.
• Integrating gender budgeting in energy infrastructure—providing free liquid petroleum gas cylinders
for Pradhan Mantri Ujjwala Yojana beneficiaries for next three months has been announced. These
three components are expected to cost the union government about Rs 46,000 crore.
• It also intends to hand out free cooking-gas cylinders to 83 million poor families, a one-time cash transfer
of $13.31 to 30 million senior citizens and $6.65 a month to about 200 million poor women for next three
months.
• There will be an expected increase in daily wages under MGNREGA, from Rs. 182 to Rs. 202, allowing
EPF withdrawal for organised sector workers and doubling the collateral-free loan limit to Rs. 20 lakhs
to self-help groups. The promised increase in rural employment guarantee scheme wages could cost the
government Rs 10,100 crore.
• About 40% of the announced amount is on account of Building and Construction Workers Welfare
Fund and District Mineral Fund (DMF). The former is a corpus of about Rs31,000 crore with about 3.5
crore registered workers. The DMF has about Rs 35,000 crore, directed to be used for augmenting the funds
for fighting the COVID-19 pandemic.
• An insurance scheme for health workers fighting COVID-19 in government hospitals and health care
centres; involves an insurance coverage for about 22 lakh health workers to the tune of Rs50 lakh per
worker.
• A transfer of Rs17,287 crore by the union to the states was announced on 3rd April. Out of this, Rs 6,195
crore is on account of revenue deficit grant on the recommendations of the Fifteenth Finance Commission and
is available to 14 states. The rest is under the State Disaster Response Mitigation Fund.
• Free provision of an equal amount of eligible quantity of cereals and pulses for three
months has been announced.
• Raising of the limit of collateral-free lending to self-help groups (SHGs) is expected to
benefit about seven crore households.
• The government will pay the employer’s and employee’s share to Employees’ Provident
Fund (EPF) for those workers with monthly salary less than Rs15,000 in establishments
which employ less than 100 workers.
• A second stimulus package India is poised to announce in coming days will be worth around Rs
1 lakh crore ($13 billion) and focus on help for small and medium businesses.
• The new package aimed at MSMEs could include increases in the limits of bank loans for
working capital needs, hiking threshold limits for availing tax exemptions and relaxing
rules for deposits of income tax and other dues.
MONETARY POLICIES:
The announced monetary policy has paid attention to ensuring liquidity, reducing cost of loans, encouraging
transmission and regulatory easing.
• Reduction of the Cash Reserve Ratio (CRR—the average daily balance that banks are required to
maintain with the RBI)— by 100 basis points (bps) to 3% will infuse liquidity to the tune of Rs1.37
lakh crore into the banking system.
• Similarly, Targeted Long-term Repo Operations (TLTRO) that allows banks to keep funds borrowed at
repo rate for a longer period of time at the current rate of three-year tenor will add another Rs1 lakh
crore.
• Acco­mmodation under Marginal Standing Facility (MSF) allows scheduled banks to borrow additional
amounts, over and above Liquidity Adjustment Facility (LAF) at a punitive interest rate, which has been
raised to 3% of the Statutory Liquidity Ratio (SLR) portfolio from the earlier 2%. This can infuse a
liquidity of Rs 1.37 lakh crore.
• If they have excess funds, they can park the funds at reverse repo rate. Under LAF, repo rate has been
reduced by 75 bps, taking it to 4.4%. The reverse repo rate has been reduced by 90 bps to 4%. Given
the inflation target of 4%, this brings our real interest rate close to zero. (The LAF involves overnight
and term repo auctions. It helps banks to tide over daily liquidity mismatches, mainly to maintain the
CRR. If banks are short of funds, they can borrow at the repo rate.)
• New regulatory steps have been announced. A moratorium on term loans and working capital loans for
three months is expected to provide relief to the borrowers.
• The RBI has also used a trick to encou­rage transmission of these rate cuts by widening the monetary policy rate
corridor. It is determined by the reverse repo and MSF rates. The difference between these two rates, which
was 50 bps is increased to 65 bps. With a reverse repo rate of 4%, it has become less attractive for banks
to park their funds with the RBI. This is expected to nudge banks to lend more.
• Deferment of implementation of the net stable funding ratio and last tranche of capital conservation
buffer are expected to provide relief to the banking sector.
• The RBI also has done its bit to help the states and union territories. The central bank had already constituted an
advisory committee to review the limit ways and means advance (WMA) limits for state governments and
union territories. Pending its final recommendations, the RBI, through an announcement on 1 April, has raised
the WMA limits for states and union territories by 30% to help them tide over the situation. However, as the
calendar for market borrowing for the first quarter of the new fiscal shows, the yield curves in the bond market
are likely to face an upward pressure. During this period, union government will borrow Rs3 lakh crore, and
all state governments together are expe­cted to borrow about Rs1.27 lakh crore.
• The RBI on Friday allowed banks to put on hold EMI payments on all term loans for three months and cut
interest rate by the steepest in more than 11 years as it joined the government efforts to rescue a slowing
economy that has now got caught in coronavirus whirlwind.
 EFFECTS OF POLICIES INTRODUCED

FISCAL:
• The situation requires simultaneous policy inter­ventions in terms of public health infrastructure,
livelihood and humanitarian issues emanating from the inter-state migration crisis.
• According to IMF, there is scope for additional spending in these areas, beyond what has already
been announced, as well as a need to enact policies which support MSMEs who have been hit by the
(appropriate) social distancing measures and nationwide lockdown.
• The stimulus package will clearly result in increased government spending and as a result might
lead to higher levels of deficit. Consequently, over the medium term, substantial new measures
will be needed to bring the deficit and debt back towards the central government's medium-
term targets (deficit of three per cent and debt of 40 per cent as a share of GDP).
• There is more scope for more "urgent" policy actions in India as the economic toll from the
COVID-19 pandemic is likely to be "large", a top IMF official said, noting that the fiscal stimulus
package unveiled by the government to mitigate the impact of the COVID-19 is a step in the right
direction.
• The economic toll from the pandemic is likely to be large. We estimate that growth in the fiscal
year 2020/21 will be reduced to 1.9 per cent, reflecting both the domestic COVID-19 impact
from the unprecedented national lockdown and weak external demand.
• Growth is weighed down by weak domestic demand from containment measures including the
unprecedented national lockdown.
• One thing the current crisis has revealed is the vulnerability of Indian workers to a shock that
forces a near end of economic activity.
• The package has appropriately included in-kind (food; cooking gas) and cash transfers to lower-
income households; insurance coverage for workers in the healthcare sector; and wage support to
low-wage workers. Proper implementation of such measures is needed so that no one is left out
when it comes to tackling hunger during the pandemic.
• An interesting fact about the package is that about 40% of the announced amount is on account of
Building and Construction Workers Welfare Fund and District Mineral Fund (DMF). These two
programmes—cess and DMF—are designed within the framework of cooperative federalism between
the centre and the states. There are ambiguities regarding the centre–state financial relations in
arriving at a COVID-19 mitigation strategy and the stimulus package, which need clarification.
• Although the anno­uncement of an insurance scheme for health workers fighting COVID-19 in
government hospitals and health care centres is a welcome step, lack of coverage for the majority
who work in the private sector is a cause for concern.
• The government paying the employer’s and employee’s share to Employees’ Provident Fund
(EPF) for those workers with monthly salary less than Rs. 15,000 in establishments which
employ less than 100 workers is a positive step. It is not a huge commitment and will not benefit
them immediately although it grants the workers assistance for the time being and hope in the
medium term.
• Frontloading of the PM-Kisan transfer by about four months is expected to benefit about eight
crore households, although it does not involve any additional expenditure. In fact, it involves an
expenditure of Rs.17,500 crore out of the budgeted Rs.75,000 crore in Union Budget 2020–21.
• The fiscal measures are expected to help energize an already depressed economy just
enough to fight the impacts the COVID crisis has laid upon the economy, so a jump in GDP
growth should not be expected.
• Inflationary effects might not be felt immediately, but could be expected when the
lockdown is lifted and economic activity resumes.
• No support measures have been announced by the government for the migrant labourers, who
are stuck due to the imposed lockdown.
MONETARY:

• The cutting down of policy rates by RBI would help push lending rates down,
encourage banks to infuse money into productive sectors, infuse liquidity and address
the financial stress in the system.

• The cutting of policy rates may soothe the nerves of equity investors and reduce EMI’s for
borrowers but it will be quite disastrous for Fixed Deposit(FD) investors especially the
senior citizens who are dependent on interest income. Despite RBI keeping key rates
unchanged since December 2019, major banks have continued cutting interest rates on
FD’s. The country’s largest bank, SBI, has reduced FD rates back to back in February and
March.

• The unexpected rate cut is likely to reduce equated monthly installments(EMI’s) of

borrowers and also make it cheaper to take new loans.
• Here’s an example of how home loans is likely to be impacted under the new external
benchmark regime:

Loan amount(Rs) 3000000

Tenure(in years) 20
Current Interest Rate(%) 7.95
Current EMI(Rs) 24999.92
New interest Rate(%) 7.20
New EMI(Rs) 23620.47
Cut in EMI(Rs) 1379.45

• These measures will help boost liquidity in the system and address the financial stress on
account of COVID 19 and the consequent lockdown. The substantial reduction of CRR will
help banks reduce their lending rates and aid monetary transmission. However the
reduction in interest rates will adversely affect the FD account holders.
 CONCLUSION
• Given trends in other countries, it is somewhat surprising
that the Government of India has not yet announced a Value of fiscal stimulus packages in G20 countries as of April 2020
share of GDP(%)
significant economic stimulus package. The only initiative
percentage
thus far is the Rs1.7-lakh crore package announced by the
Mexico 0.7
Finance Minister under Pradhan Mantri Garib Kalyan
South Korea 0.8
Yojana on March 26. Not all of this amount is “new money”, India 0.8
but even if it was, this package is just 0.7 per cent of the Argentina 1.2

country’s GDP. Italy 1.4

Turkey 1.5
• The possible explanation to not increase its spending is China 2.5
the presence of fiscal conservatives advising the Indonesia 2.6

government who would be against breaching the limit of Saudi Arabia 2.8

fiscal deficit given by the FRBM act. Over the past several Russia 3

EU 4
months, the sluggishness in the Indian economy demanded a
Germany 4.9
more aggressive use of fiscal policy, but the government France 5
continued to repose faith in monetary policy, with the RBI Brazil 6.5

continually lowering the interest rates in order to “attract” Canada 8.4

investors. Strangely, even now, the RBI seems to believe Australia 9.9

USA 11
that increasing liquidity in the system is the way
Japan 20
forward, and hence its recent decision to decrease the
repo rate.
• With the unprecedented economic distress being witnessed in the country, the worst in the
post-independence era, the government must urgently announce a substantial stimulus
package having two clear objectives: one, addressing the plight of the working class, which
has lost its dignity having been forced on to the streets in the aftermath of the lockdown; and
two, providing meaningful support to an already distressed agriculture, which now faces
the additional burden of reverse migration.
• Those at the bottom of the pyramid need substantially more than the Rs500 that the
Finance Minister had promised in her package.
• Further, the government agencies must be prepared to procure the rabi harvest in much
larger quantities, since private markets have all but collapsed due to the lockdown.
• Moreover, the government could take a cue or two from its counterparts in countries
that have announced the stimulus packages and identify the sectors which are the
lifelines of the economy, like small businesses and transport. These sectors need
significant hand-holding for them to help get the economy back on track, above all by giving
back the workers their jobs.
• Finally, this is possibly the moment for strengthening the beleaguered public health
system. There is no gain-saying that the government’s ability to assist the hundreds of
millions whose lives and livelihoods would be the true test of democracy in this country.
 CONTRIBUTIONS

• Abhijit Kumar Sahani: Contributed to “Effects of Policies Introduced” slides (Slides 15 to19) and to the
overall development of the Project.

• Anandarup Sengupta: Contributed to “Effects of Policies Introduced” slides (Slides 15 to19) and to the
material survey for the Project.

• Subham Ghosh: Contributed to “Economic Policies Introduced in Response to COVID-19” slides (Slides 10
to14) and to the material survey for the Project.

• Suchetan Banerjee: Contributed to “Introduction” slides (Slides 2 to7) and to the material survey for the
Project.

• Amit Kumar Das: Contributed to “IS-LM Analysis” slides (Slides 8 and 9), to the overall development of the
Project and designing and editing of the PowerPoint presentation.

• Parshwonath Dey: Contributed to “Conclusion” slides (Slides 20 and 21) and to the overall development of the
Project.

• Soham Mukherjee: Contributed to “Economic Policies Introduced in Response to COVID-19” slides (Slides
10 to 14) and reviewing the PowerPoint presentation.
Thank you