Put cash in the hands of people and businesses
In an interview, finance minister Nirmala Sitharaman was asked whether monetising the deficit to make more money available was being considered. She replied, “I have kept myself open. We will have to see how things develop.” So this policy change too is not ruled out. It will depend on how the Covid-19 virus spreads going forward.
Prime Minister (PM) Narendra Modi has included long-awaited policy decisions in his economic stimulus package to get growth back on track. It has been in the doldrums thanks to the coronavirus disease (Covid-19) lockdown. But these are long-term decisions with no direct connection to the current crisis. So why have they been included in the package? Is it because the PM is using this crisis as an excuse to push through policies that have faced resistance? Perhaps he is taking a cue from former prime minister, Narasimha Rao, who used the economic crisis of 1991 as an excuse to unscramble the licence-permit raj.
The Covid-19 package promises to amend the restrictive Essential Commodities Act, 1955, to allow farmers to sell their produce anywhere in the country, and to provide legally enforceable contracts enabling them to sell directly to food processors and other customers. Farmers not being paid remunerative prices for their produce has long been a problem. Nearly 20 years ago, academics at the University of Agricultural Sciences, Dharwad, told me all their research efforts had gone into increasing production and that marketing had been ignored. One scientist said, “ Farmers come to us and say ‘we did everything you told us to produce crops and now tell us where to sell them’.” The problem of marketing was created by the restrictions that Modi is now committed to removing. But attempts to overhaul agricultural marketing have been thwarted by the states that don’t want to lose their control over agriculture and the politically influential middle men who control the mandis, lend money and provide other services to farmers. The PM will need to leverage the Covid-19 crisis if he is to overcome these vested interests.
The stimulus package also commits the PM to fulfilling his ambition to open up space for private sector participation in all sectors. Disinvestment is one component of it, but who will buy public sector units at the moment? With demand low and indebtedness high, will anyone be keen to expand their liabilities, and in doing so, take on cosseted government labour and staff habituated to the government-style of administration? The government may well have to fall back, as it has in the past, on the Life Insurance Corporation (LIC) and other public sector financial organisations to buy nationalised enterprises. But there has to be a limit to that. The LIC is currently hyperactively advertising by asking the public “why go anywhere else”. If LIC is called on to invest in more privatisations, the public may well answer “ we will go elsewhere because we don’t want to entrust any money to an organisation which makes political rather than profit-motivated investment decisions”. Fear may well persuade the Bharatiya Janata Party and voters that the government should raise money by these sales, but won’t buyers be put off by the pandemic’s uncertainties?
The agricultural reforms will need to bring all the stakeholders on board. The sale of public sector companies will require case-by-case planning. These and other reforms promised in the stimulus package will not provide immediate relief for those whose livelihood is worst-affected by the pandemic, or create the demand which business and industry are crying out for.
India will have to abandon its traditional cautious policy on deficit financing, which is sanctified by law, and put cash in people’s hands, and in the bank accounts of businesses , particularly micro, small and medium enterprises.
In an interview, finance minister Nirmala Sitharaman was asked whether monetising the deficit to make more money available was being considered. She replied, “I have kept myself open. We will have to see how things develop.” So this policy change too is not ruled out. It will depend on how the Covid-19 virus spreads going forward.