Recognising the pain, Narendra Modi, the prime minister, on May 12th pledged an almost mythical-sounding 20 lakh crore rupees of fresh government spending, equivalent to $265bn or 10% of GDP, to reignite growth. Over the next five days a bank of finance-ministry officials faced cameras, unveiling slice after slice of measures, carefully designed to add up to Mr Modi’s magic number.
Yet although analysts expect the extra spending to push the budget deficits of the central government and the states to about 12% of GDP, and raise the country’s overall debt-to-GDP ratio to a wobbly 80%, many doubt that the measures will work. “What we needed was large tranches of money to go into circulation without ado,” said an editorial in Mint, a financial daily. But instead of a demand-side boost, and in particular urgent cash support for the poorest, what Mr Modi delivered was a hotchpotch of supply-side inducements and prods such as credit guarantees, along with reforms whose impact will only be felt in the medium term, at the earliest. Most of the stimulus was made up either of previously announced measures, or central bank moves to spur lending. Estimates of the actual new fiscal commitment by Mr Modi’s government range from a puny 0.7% of GDP to 1.3%, a far cry from the touted 10%.
Predictably, Mr Modi’s defenders explain that it is prudent to keep the government’s powder dry, considering that its budget amounts to just a sixth of GDP—far less than in richer countries—and it is not yet clear when the crisis will end. Instead of simply throwing money at the poor, the government has instead made it far easier for the small firms that employ most Indians, and form the backbone of the economy, to borrow and invest. The government has, to its credit, enormously increased spending on a rural jobs programme that Mr Modi dismissed as a boondoggle while in opposition. And such reforms as eliminating restrictions on the internal trade in agricultural goods and switching to a national, rather than state-based, system for distributing subsidised food are not just helpful to the poor, but also save the government money.
Even so, it is not just soft-hearted lefties who accuse Mr Modi of stinginess. Two of India’s Nobel laureates, the economists Amartya Sen and Abhijit Banerjee, had suggested that monthly emergency payments of up to $100 could help tide over many families. Instead, the sums offered so far amount to $6.60 each a month for perhaps 200m poor women, and promises of a one-off $26 apiece to some 70m farmers. Even for the 60% of Indians who survive on less than $3.20 a day, the World Bank’s poverty line for lower middle-income countries, such measly sums will not last long, much less stimulate the demand needed to generate jobs. A mountain of bad debt was already weighing on spending and investment before the coronavirus came along. Yet the government and the central bank seem to be hoping to revive the economy by encouraging lending. Critics see attempts to spur a borrowing binge before the wreckage of the previous one has been cleared away as not just optimistic, but foolhardy. “Expecting bank loans to grow more rapidly now is at best a pipe dream,” says Vivek Kaul, a columnist. ■
