Economic growth is about increasing the value of measurable economic activities, and is a convenient (if overemphasised) proxy for increases in welfare. One can measure aggregate economic activity by capturing its components, valuing them and adding them up, either from the perspective of expenditure, or income. India’s pandemic lockdown brought a forced halt to a large fraction of economic activity, so national income and expenditure would naturally take a big hit.
The problem in such circumstances, aside from the fundamental issue of basic survival for many people affected by the loss of income, is that such reductions have ripple or multiplier effects, deepening and prolonging the initial loss. This phenomenon led to the Great Depression of the 1930s, and that traumatic time helped to change the way in which appropriate economic policy responses were conceived. In particular, government was recognised as being uniquely able to spend in bad times (including transferring money to its citizens, who would do the actually spending in that case), to cushion first-order income losses and their even more substantial ripple effects.
Every government has been responding in this manner to pandemic-caused halts to economic activity. In previous columns, I reported what I thought was a broad consensus view, that the Indian government’s fiscal response has been inadequate, given the hit taken by the economy as a result of the lockdown. It has been a bit difficult to estimate the overall impact of government measures, in terms of net fiscal “stimulus”, but a dozen or so different analysts reported numbers mostly ranging around 1% of GDP (the standard measure of aggregate economic activity). Recently, however, Surjit Bhalla, who holds a very important position as India’s Executive Director at the International Monetary Fund (IMF), provided a headline number of a 5% fiscal package.
He argued that this is one of the largest responses among all economies in the world, and that India is now “Ready for Growth”. I hope he is correct, but given the importance of this issue for the Indian economy going forward, the basic issue of how much the government is supporting aggregate economic activity seems to be worth re-examining, before one gets into issues of the quality of structural reforms and long-run growth prospects.
Bhalla bases his estimate on the IMF Policy Tracker, which reports its own estimates of various components of the government’s economic package. He reports added expenditure of 3.5% for poor households, migrant workers and agriculture, plus another half percent transfer to state governments, together totalling 4% or so. The headline number is not derived explicitly, but is supported by some qualitative arguments, including methodological disagreements with all the analysts who preceded him. The methodological issues seem to be complex, and include issues of where spending gets counted, and whether certain kinds of guarantees indirectly support spending that would otherwise not have taken place.
Who is more accurate? Reviewing one analysis, as reported in The Wire on May 17, provides a detailed calculation of a direct fiscal stimulus of 1% of GDP, much less than the IMF numbers, the sources of which are not provided. More recently, Pronab Sen, former chief statistician of India and chairman of the National Statistical Commission, has also offered calculations that amount to around a 1% fiscal stimulus, possibly doubled by multiplier effects. Using a consistent approach, he estimates the corresponding response to the 2008-09 crisis, which was much less severe, at 3% of GDP. Yet, another detailed and thoughtful evaluation of the entire economic package, by Rajeswari Sengupta and Harsh Vardhan (like Sen’s analysis, available at www.ideasforindia.in) concludes that the incremental government spending in the overall package is less than 2% of GDP.
Several analysts of the temporary shock to economic activity estimate its magnitude at 10% or more of annual GDP for 2020-21. In that case, even a 5% stimulus would be inadequate, and the bulk of analyses indicate that even allowing for indirect effects, the total package the government has come up with is less than that. On the bright side, the monetary policy response has been more appropriate, but monetary policy measures are not as direct as putting money into people’s pockets, and the distributional impacts are also less favourable than when money is transferred to the poor.
I have not been able to find an official government analysis, or a rebuttal of academic and private sector analyses of the economic package, beyond the government’s own discourse and framing. The issue is not one of politics or of the quality and impact of economic reforms: it is a basic question of what the government is actually planning and accomplishing in its efforts to engineer an economic recovery from the lockdown. India will resume growth, but the questions are how much and how soon, and what will be the ultimate economic cost in terms of lost income and welfare. The answers depend on what the government does, and, at least to me, it is not clear that it is doing the best it can.
Professor of Economics, University of California, Santa Cruz. Views are personal