Union Budget 2021: No time for timid steps, time to turn stimulus taps full on!

Former RBI chief Raghuram Rajan says that the forthcoming Union Budget should provide relief to poor households and small and medium-sized enterprises to boost consumption

Representative Image (Courtesy: Twitter/ @DeloitteIndia
Representative Image (Courtesy: Twitter/ @DeloitteIndia
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V Venkateswara Rao

In an interview to a business TV Channel, former Reserve Bank of India chief Raghuram Rajan said the economy will reach pre-Covid levels by late 2022 and that the forthcoming Union Budget should provide relief to poor households and small and medium-sized enterprises to boost consumption. Rajan surmised that it will take longer time for the recovery of the Indian economy, than what the RBI and the Government are forecasting.

“This pandemic has a much greater effect on the informal sector, the small and medium enterprises, the ones that don’t have deep resources…Certainly when you look at formal employment, it’s down significantly. But informal employment is probably down much more and guesstimates are, you know, maybe 18 million people are unemployed right now, relative to what they were before the pandemic hit,” he said. Rajan further added that one of the best ways to get the economy back on track was to boost spending on infrastructure.

The Centre announced the Aatmanirbhar Bharat Abhiyan stimulus package (1.0) in mid-May, which amounted to 10.3% of GDP, to stimulate the Indian economy. The direct fiscal stimulus component was just about 1.3% of the GDP.  More than 7.8% of GDP was about providing easy credit to the MSMEs, traders, farmers etc and liquidity infusion measures by RBI - items that are outside government budgetary accounts. The International Monetary Fund’s (IMF’s) economic outlook report of Oct'20, notes that advanced economies have stimulus of an average 9% of GDP, while India's direct fiscal stimulus is less than 2% of GDP.

Unemployment, underemployment, low wages and inequalities are persistent problems plaguing the Indian economy in the best of times, even before the pandemic. The top 10% of the Indian economy consumes more than the bottom 50%. India does not have a comprehensive income database and consumption expenditure is the best proxy for income data.

As per the periodic labour force survey (PLFS) for 2018-19, the average monthly income is Rs 16,160 for salaried formal sector workers, Rs 8,340 for casual workers (for non- public works related) and Rs 10,725 for self-employed workers. In comparison, the employees of India's federal and state governments are the fortunate lot with better salaries, job security, post retirement pensions and several other social security measures.

“I had suddenly lost my job and needed to meet essential requirements. I had no idea that borrowing a mere Rs 8,000 would mean I would end up repaying Rs 30,000 by way of hefty charges and interest” said a victim of the sensational loan app scam who was harassed and abused by tele-callers, causing extreme tension that pushed him into depression, as per media reports.

“The interest rate is 35 per cent (by the loan apps). After the due date, a flat Rs 3,000 as penalty per day is levied on the customer. Many customers end up borrowing more to repay a previous instant loan, and end up in a deep pit from where escape would be difficult," explained the Cyberabad police officials. Police said they have written to Google, urging it to take out 158 instant loan apps from the Play Store.

Many small-time employees who have lost jobs have borrowed from such unregulated loan apps and have become victims of their recovery threats. Since December 20, six people died of suicide in Telangana due to harassment by fraud loan apps.


"India's very weak fiscal position has constrained its scope for discretionary stimulus spending in response to the coronavirus shock," global rating agency Moody's said projecting federal government's debt burden to peak at around 90% of GDP this year, up from about 72% of GDP last year. Analysts have come up with many explanations for the low fiscal stimulus and weak government spending. The government is wary of a sovereign credit-rating downgrade in case the fiscal deficit deteriorates further. India is also battling high inflation, which means that a demand stimulus would further add to the price pressures.

We are currently facing a lifetime crisis of lives and livelihoods. Concerns relating to fiscal deficit and inflation pale before fading lives.

( V Venkateswara Rao is an alumnus of IIM, Ahmedabad and a retired corporate professional.)

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