PM’s Atmanirbhar Bharat Was about Demand; FM’s Financial Package Was about Supply
Chinese Whispers is a game in which players form a line and the first player comes up with a message and whispers it into the ear of the second person in the line. The fun lies in enjoying how the original message gets distorted by the time it reaches the last person in the chain. The analogy is quite useful in understanding how a call by the Prime Minister (PM) Modi for a demand-led growth eventually became supply side response in the Atmanirbhar Bharat. 
 
The PM’s clarion call for Atmanirbhar Bharat lays down five pillars of self-reliance. These include – “[e]conomy, which brings in a quantum jump and not incremental change;
 
Infrastructure, which should become the identity of India; System, based on the 21st century technology driven arrangements; Vibrant Demography, which is our source of energy for a self-reliant India; and Demand, whereby the strength of our demand and supply chain should be utilized to full capacity.”
 
There was no ambiguity in the PM’s message; it was a vision of a demand-led package aimed at full utilisation of the existing capacity powered by local products and make them global. The point which remains a mystery is how such a clear message was distorted to point out that demand became supply and the very core of Atmanirbhar Bharat went missing over the next five days. 
 
The distinction between demand and supply is always not apparent as both are functions of price. But supply is always a function of factor prices and quantity of factors employed (factors meaning land, labour and capital). Demand, on the other hand, is a function of income. An expansion in demand by way of income leads to expansion in supply by way of investments in capacity to meet the final demand of consumption.
 
The confusion between demand and supply is the not the only one in the financial package. The distinction between liquidity and solvency has been missed out as well. A short-term mismatch between inflows and outflows creates liquidity risk which can be addressed by lowering interest rates and increasing drawing power. This is what the Reserve Bank of India (RBI) has done. But a protracted period of liquidity risk transforms itself into a solvency risk and is sure to surface in a demand-deficient economy. Meaning, if enterprises don’t have money for a prolonged period, they will draw down upon their liquidity and will become insolvent over time.
 
The string of measures announced address the liquidity risk with scant regard to the impending solvency crisis. Solvency can only be addressed by restructuring liability. So, a reduction in the tax deducted at source (TDS) rate is addressing liquidity, not solvency, which will require a change in the overall tax liability. India’s own economic history since the 1980s is testimony to this kind of macroeconomics where domestic capacity additions funded by foreign currency loans, in the absence of demand, led to a balance of payment crisis in 1990.       
Golden Opportunity Missed
 
At least there is no confusion on one point that there is a COVID-19 pandemic – a health emergency. From this view point also the allocation to health-related supply and infrastructure is just Rs4,000 crore under the head “Promotion of Herbal Cultivation”. If we add to this the Rs15,000 crore allocated for COVID-19 containment prior to the announcement, the overall allocation to heath sector in response to health emergency is just 0.904%. 
 
The National Infrastructure Pipeline (NIP) Report which was made public just 10 days before the announcement noted on page 164 (Volume II that: “Compared with the population and the number of people requiring medical treatment, the available quantum of healthcare systems is sub-optimal. This has resulted in higher casualties due to preventable and curable diseases.
 
“There is an urgent need to upgrade existing government healthcare infrastructure by adding more beds, equipment, doctors and staff in government hospitals and primary healthcare clinics, especially in smaller towns and villages.”
 
Had the package made infrastructure push in the health sector as the basis for Atmanirbhar Bharat, the cascading impact would have been far more potent.
 
A simulation based on Leontief’s Input Output Analysis suggests that Rs100,000 crore stimuli to the health sector (Rs1.51 lakh crore allocated for the period FY20 – 25 planned under NIP) would have generated a total demand of Rs 1.6 lakh crore. 
 
The capacity so created would have not just increased the service standards in Ayushman Bharat but help fight future disease outbreaks. Had the allocation to the sector been prudently decided, the pandemic was the right opportunity to create superior, accessible, primary, secondary and tertiary healthcare infrastructure facilities across India to meet the National Health Policy 2017 goals.       
 
The multiplier effect would have been even higher if other projects mentioned in National Infrastructure Pipeline Report, which comes close to the PM’s call of an “Infrastructure, which should become the identity of India; System, based on the 21st century technology driven arrangements,” were given immediate priority.  
 
All in all there is a wide gap between what was envisioned what was presented. To add to this, the mode of financing the package remains unclear. Of the Rs21 lakh crore, approximately Rs8 lakh crore or 38% is parked in the RBI reverse repo window. For this part of the stimulus to hit the economy, the velocity of circulation of money has to increase which needs a demand side stimulus and is critically dependent on the monetary policy transmission. So far, rate cuts have not translated into growth in credit. 
 
Thus, despite positive measures, such a creation of a unified market in agricultural produce and increased allocation to MGNREG (Mahatma Gandhi National Rural Employment Guarantee Act), the long-term objectives and attendant priorities have no link to the original vision of Atmanirbhar Bharat.  
 
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    COMMENTS

    yerramr

    6 months ago

    Article has rightly highlighted the most missing but essential component of self-reliant Indian economy - Health sector. Health and education continue to get very poor attention. Covid-19 did not help in remedying the situation.

    shirish.s

    6 months ago

    Atmanribhara is wasting crores of public money in this coronavirus pandemic.

    nadeemajshaikh

    6 months ago

    Unfortunately the allocation to the health sector, even at these times, is pathetic.

    Ramesh Popat

    6 months ago

    all the above and below very well known to govt.
    but none knows what govt know!

    shetyerb

    6 months ago

    Atmanirbhar was created so that Rahul Gandhi cannot pronounce it.
    Jokes apart, the whole 20 lac crores package is a JUMLA to use the Party language.

    S.SuchindranathAiyer

    6 months ago

    An excellent review of the gap between Monkey Bath and Monkey Do:
    But this is not the Finance Minister’s fault. This is the unreality of Modi’s day dream juxtaposed with India’s waddling Neta-Babucracy that sees everything through the prism of the 73 years old Quoat (Reservations / License) and Corruption (Extortion / Percentage) Raj, both unrelated to what India is.
    As the old saying goes, if the roots are rotten, the tree is rotten. India’s roots are mired in the immutable Colonial-Communist legacy policies since 1947. The dominant force of stealing from some for the benefit of others on the basis of caste, tribe, religion, gender, language, geography and proximity to power to create a Nouveau Kleptocracy (Judges, Bureaucrats, Police, Politicians) sans competence or integrity through the twin instruments of Quota (Reservations / License) and Corruption (Extortion / Percentage) remains unchanged since 1947 to 2020. Rather most of Modi’s legislation buttresses these suicidal policies. So you can pour as much money as you want into the Black Hole of India, it will all go waste. It is like dissolving asafoetida in the ocean or air dropping water from the seas on the Gobi Desert.
    When the roots of Indian Government, whether Congress or BJP are so suicidally negative, to pretend positivity is possible only for those hypnotized by Modi (I am far too erudite, educated and with too much integrity to be so hypnotized) who is replacing Governance with Government and Government with technology while pursuing his multi appeasement policy:
    (1) Appeasing with doles, increments and pampering of Moslems, Christians, SC, ST, BC, OBC, Judges, Bureaucrats, Police, Politicians, Public Sector and Crony (election bond) Capitalists at the cost of the rest of the Nation
    (2) Bribe diplomacy of giving doles and aid to countries in competition with a far wealthier and more powerful China at the cost of Non VIP Indian citizens and India
    (3) Appeasing China by running up a trade deficit with China larger than India’s defense budget and taking advantage of India’s woeful lack of indigenous ability and capacities in governance, science, technology, integrity, quality and engineering to purchase arms from the remaining four Permanent Members of the UN Security Council with scant regard for India’s best interests in terms of economy, value for money, military strategy, tactics and readiness.
    There is a serious lack of pragmatism, rationalism and existentialism in Indian policy which is more "Cyrano De Bergerac" than Keynes or Roosevelt. There has to be a balance between existentialism (for diagnosis), rationalism (for planning), pragmatism (for action) and idealism (for goal setting)

    COVID-19: Indian States’ Deficit To Increase to 4.5% of GDP and Market Borrowings To Jump to Rs8.25 Trillion, Says Ind-Ra
    Like many countries across the globe, India has been hit by the COVID-19 pandemic and it has come at a time when the country was already facing a broad-based economic slowdown, with revenues of both the Central and state governments under pressure. The aggregate fiscal deficit of states in Indian will now rise to 4.5% of gross domestic product (GDP) in FY21 as against earlier forecast (f) of 3%, says India Ratings and Research (Ind-Ra).
     
    The ratings agency has evaluated the revised estimates (RE) for FY19-20 and FY20-21 budget estimates (BE) of 20 states, Assam, Bihar, Chhattisgarh, Goa, Gujarat, Haryana, Himachal Pradesh, Jharkhand, Karnataka, Kerala, Maharashtra, Manipur, Odisha, Punjab, Rajasthan, Tamil Nadu, Telangana, Uttarakhand, Uttar Pradesh and West Bengal. 
     
    Ind-Ra says, "Since these states presented their budgets before the corona virus (COVID-19) induced nation-wide lock-down, the nominal gross state domestic product (GSDP) growth projected for FY19-20 by respective state governments is mostly upwards of 10%, which in our opinion is aggressive and unlikely to be realised." 
     
    The ratings agency believes the fallout of the COVID-19 crisis would be severe on the Indian economy. The extended nation-wide lock-down would exacerbate the economic downturn as the agency’s estimate pegs the nominal GDP growth at 0.9% for FY20-21 compared with its forecast of 6.8% in FY19-20.
     
     
    State governments were already faced with a lower-than-budgeted share in central taxes and subdued own revenue growth, when the 21 days economic lock-down was imposed from 25 March 2020 in India. The 20 states considered in the analysis constituted nearly 86% of the budgeted aggregate revenue receipts for FY19-20. 
     
    Ind-Ra says, "The aggregate revenue receipts of these states came in lower by 4.2% than budgeted at Rs24.79 trillion in FY19-20(RE), primarily led by a 16.2% reduction in the devolution of central taxes against BE. States’ own tax revenue receipts was lower by 2.2% in FY19-20(RE) than Rs12.04 trillion in FY19-20(BE).  The revenue and fiscal deficit is budgeted at 0.02% and 2.5% of GSDP in FY20-21(BE)."
     
    "States, in all likelihood, will face significant slippages from the FY21BE. The extent of slippage would vary depending on the pace at which economic activity limps back to life. Despite the relaxation in COVID-19 related restrictions in mid-May 2020, the revenue balance of states in FY20-21 is set to worsen, particularly for those which already run sizeable revenue deficits. The agency estimates a higher revenue deficit of 2.8% of GDP than its earlier forecast of 0.4%," the ratings agency added.
     
    Ind-Ra has revised upward its estimate of gross market borrowings of states to Rs8.25 trillion in FY20-21 from its earlier estimate of Rs6.09 trillion. The ratings agency says it expects states to resort to higher market borrowings to fund the fiscal deficit. The pressure on state governments to provide support to households and businesses through fiscal stimulus measures is set to increase.
     
    In Ind-Ra’s assessment, gross and net market borrowings of states in aggregate would constitute 4.1% and 3.3% of GDP, respectively, in FY20-21. 
     
    While estimating fiscal deficit and market borrowings, the ratings agency has considered the fiscal space available to states and the increase in the borrowing limit to 5% from 3% of GSDP for states, which was announced as part of the Central government’s COVID support package on 17 May 2020. States’ borrowing ceiling is Rs6.4 trillion based on 3% of GSDP for FY20-21.
     
    The enhanced limits would enable states to borrow an additional Rs4.28 trillion in FY20-21. A part of the borrowing, however, is conditional and is linked to states’ performance on milestone-based achievement in at least three out of four reform areas outlined by the Centre, it added. 
     
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    Rajasthan govt allows opening of parks, cab and auto services
    Amending the guidelines announced during Lockdown 4.0 on May 18, the Ashok Gehlot government in Rajasthan allowed the restoration of taxi, auto and cab services in the Red Zone and also permitted the public parks to open from 7 a.m. to 6.45 p.m.
     
    Permitting the sale of pan, gutkha and tobacco products in the state, removing them from the prohibited commodities to be sold under lockdown-4, the Home department clarified that no person will be able to use such products in public places.
     
    According to the order, spitting in public places still remains a punishable offence.
     
    Amending the guidelines of Lockdown 4.0, the state government allowed plying of taxis, autos and cabs in the Red Zone by ensuring social distancing and sanitation conditions.
     
    The modified order said that a cab can carry three people including driver while in auto rickshaw only two persons are permitted to travel. The driver will have to wear mask and ensure sanitisation of seats.
     
    The government has also permitted for opening of public parks in the Red Zone areas from 7 a.m. to 6.45 p.m.
     
    These activities, earlier, were allowed in the areas falling in the Orange and Green zones.
     
    Meanwhile, ban on public gathering continues as before.
     
    Further, it was also clarified in the revised order that hand rickshaws, kiosks, small food shops, juice, tea and other shops have been given approval to operate but on the condition that cleanliness and hygiene protocol will have to be taken care of.
     
    Additional chief secretary Rajeev Swaroop said that municipal authorities shall ensure compliance of these orders.
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
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