COVID-19 Inflation Crisis and Indian Economy | Editorial Hunt | 6th April 2020

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IASbhai Editorial Hunt

The most common way people give up their power is by thinking they don’t have any.– Alice Walker

Dear Aspirants
IASbhai Editorial Hunt is an initiative to dilute major Editorials of leading Newspapers in India which are most relevant to UPSC preparation –‘THE HINDU, LIVEMINT , INDIAN EXPRESS’ and help millions of readers who find difficulty in answer writing and making notes everyday. Here we choose two editorials on daily basis and analyse them with respect to UPSC MAINS 2020.

EDITORIAL 45:“A niggardliness that is economically unwarranted

       SOURCES:   THE HINDU EDITORIAL/EDITORIALS FOR UPSC CSE MAINS 2020

Prabhat Patnaik

Prabhat Patnaik is Professor Emeritus, Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi

 

      HEADLINES:

A niggardliness (reluctant to give or spend) that is economically unwarranted

      CENTRAL THEME:

The Centre can afford to step up its COVID-19 assistance to a higher scale; fiscal deficit is no worry

SYLLABUS COVERED: GS 3:Inflation:Economy

      MAINS QUESTION:

Aftermath of COVID-19 crisis would be sheer bouncing back on various economic fronts. Analyse -(GS 3)

      LEARNING: 

  • Author initiates a comparison between various economies on capital expenditure and suggests some wonderful solutions to tackle inflation .
  • The other aspects he mentions is about countering fiscal deficit with ease and explain the reasons to bounce back !

      INTRODUCTION: 

The three-week long lockdown imposed on the country, it can be argued, was an over-reaction.

More widespread testing of possible cases, “social distancing”, self-quarantining by the elderly, and selective lockdown of sensitive areas (as the Chinese government did in Wuhan) might have been quite adequate.

Ameliorative(improving) steps made necessary by it should have been announced simultaneously, to prevent the mass exodus of migrant workers which occurred not because of any “Fake-News”-induced panic, as the government claimed before the Supreme Court, but out of sheer desperation.

Instead, some steps were announced by the Finance Minister a full 36 hours into the lockdown; and they were minuscule.

      BODY: 

A COMPARISON

Indeed, India stands out among all the countries of the world as much for the scale of the draconian measure it has imposed as for the extent of unconcern it has displayed for the working poor affected by it.

  • In the United States, for instance, where the lockdown has raised the number of persons filing unemployment claims from 2.8 lakh to 6.6 million in a matter of days, those affected can fall back on unemployment benefit; and the government has approved a package of ameliorative steps costing roughly 10% of that country’s GDP to cope with the crisis.
  • In India by contrast, the Finance Minister’s package comes to less than 1% of its GDP; and much of it is just a repackaging of already existing schemes.
  • New expenditure comes to just a little over half of the ₹1.7-lakh crore earmarked for the package.

Besides, none of the steps will help the migrant workers; not even the larger foodgrain ration which in principle could, because most of them would have ration cards back home rather than in the places where they stay.

WHAT CAN BE DONE

MICRO ECONOMIC PLAN:

  • Many economists and civil society activists had suggested a cash transfer of ₹7,000 per month for a two-month period to the bottom 80% of households to tide over the crisis, in addition to enhanced rations of foodgrains and the inclusion of certain other essential commodities within the ration basket.
  • The cost of their proposed cash transfers alone would come to ₹3.66-lakh crore, which is more than 10 times the cash transfers provided in the Finance Minister’s package.
  • Providing assistance on the scale proposed by civil society organisations is necessary; it will no doubt pose logistical problems, but not financial problems.

MACRO ECONOMIC PLAN:

  • Even if all of it is financed through a fiscal deficit for the time being, the economic implications of such an enlarged deficit would not be forbidding.

These implications can manifest themselves in two ways:

  • One is through inflation,
  • The other by precipitating a balance of payments problem.

Let us consider each of these.

As long as supplies of essential commodities are plentiful and these are made available through the Public Distribution System to the vast majority of the people, so that they are insulated against the effects of inflation.

FOODGRAINS APLENTY(in abundance)

BUFFER STOCK:

  • The supply of the most essential of goods, foodgrains, is plentiful.
  • Currently there are 58 million tonnes of foodgrain stocks with the government, of which no more than about 21 million tonnes are required as buffer-cum-operational stocks.
  • This leaves a surplus of 37 million tonnes which can be used for distribution as enhanced ration, or for providing a cushion against inflation.

HARVEST :

  • The rabi crop is supposed to be good; as long as it is safely harvested, this would further boost the government’s foodstocks.
  • There are some reports of labour shortage holding up harvesting.
  • This may be a temporary problem that would disappear once the lockdown eases; but if necessary Mahatma Gandhi National Rural Employment Guarantee Act work can be extended to cover harvesting operations in areas experiencing labour shortage.

DEMAND ANALYSIS:

  • There is in short no reason to think that inflation of a worrisome magnitude will follow if the fiscal deficit is increased.
  • The increase in total demand caused by an initial increase in demand, which is financed by a fiscal deficit, is a multiple of the latter.
  • When even if the lockdown is lifted social distancing and restrictions on social activities will continue, the value of the multiplier will be lower than usual.

People in short would hold on to purchasing power to a much greater extent than usual because of the continuing restrictions on demand, which would act as an automatic anti-inflationary factor.

  • Of course there will be shortages of some less essential commodities and also hoarding on account of such shortages.
  • But since these shortages will be expected to be temporary, a result of the pandemic unlikely to last long, there will be a damper(limit) on hoarding.

ISSUE OF DEFICIT

  • True, if inflationary expectations are strong and persistent, then the prices of non-rationed commodities may rise sharply for speculative reasons;
  • State can prevent such expectations, by adopting measures such as bringing down petro-product prices, taking advantage of the collapse of world oil prices.
  • A larger fiscal deficit, therefore, need not cause disquiet on account of inflation.
On the balance of payments front, the worry associated with a larger fiscal deficit is financial flight caused by frightened investors.

FALLING RUPEE CRISIS

  • Some financial flight is already happening, with the rupee taking a fall.
  • This flight is not because of our fiscal deficit but because, whenever there is panic in financial markets, the tendency is to rush to dollars, even though the cause of the panic may lie in the United States itself.

But,

India has close to half a trillion dollars of foreign exchange reserves.

These can be used, up to a point, to check the flight from the rupee to the dollar.

If the flight nonetheless persists, then India will have a legitimate reason for putting restrictions on capital outflows in the context of the pandemic.

      IASbhai Windup: 

We are currently in a bizarre situation where cross-border movement of people is virtually barred, while cross-border movement of finance is freely allowed.

If the hardships of the people caused by the pandemic, and the lockdown it has created, are not ameliorated through larger government expenditure, because of the fear that the larger fiscal deficit required for it would frighten finance into fleeing, then the privileging of finance over people would have reached its acme(its best).

This must not be allowed.

The Centre must not worry about its fiscal deficit; and since the State governments will bear a substantial expenditure burden on account of the pandemic, the Centre must make more resources available to them.

It should raise their borrowing limits, perhaps double their current limits as a general rule, apart from negotiating the magnitude of fiscal transfers it should make towards them.


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