The Need for a Fiscal Package to Nullify the Adverse Impact of Covid-19 was Never This Urgent

Article by- Sandip Pati

The nationwide lockdown has more or less paralysed commercial activity, our exit path looks dreadfully long-winded, and the pain being seen right now could just be an initial sign of what is to come. The hardship of denizens will likely broaden once the shutdown’s second-order roll out. Estimates say that 10 trillion needed in the form of fiscal relief, once seen as too much by some, could yet turn out to be too little.

The necessity of the fiscal package by the Centre was never been so desirable as what it is today. The more time the Centre takes to introduce an effective fiscal package to answer the negative economic aftermath of covid-19, the higher it risks of pushing India’s economy to the cliff of catastrophe.

The nationwide lockdown has more or less paralysed commercial activity, our exit path looks dreadfully long-winded, and the pain being seen right now could just be an initial sign of what is to come. The hardship of denizens will likely broaden once the shutdown’s second-order roll out. Estimates say that 10 trillion needed in the form of fiscal relief, once seen as too much by some, could yet turn out to be too little.

Either way, preparatory work in terms of legal constraints should be done side-by-side with the government policies in the form of the stimulus programme. There are two important limitations that we need to be gotten ridden of. The first is the Fiscal Responsibility and Budget Management (FRBM) Act of 2003. And the second is the amendment done in 2016 of the Reserve Bank of India Act to give legislative cover to a flexible inflation-targeting framework that set our central bank the task of keeping India’s retail price index within a certain band.

Both of these were intended for long-term economic vitality but no allowance for a robust fiscal response were made to the kind of crisis we now face. It would be reasonable if these were nipped appropriately by a special session of Parliament. If not, then laws should be issued to discontinue particular regulations for a while.

Under the budget proposed in February, the Centre’s fiscal deficit for 2020-21 was projected at 3.5% of gross domestic product (GDP). This comprised a half percentage point deviation from the FRBM glide path allowed by the law’s contingency section. Total expenditure was placed at a little over 30.4 trillion, and receipts at 22.4 trillion-plus.

Projections of fiscal deficit

With tax earnings and asset-sale realisations expected to fall short, the fiscal gap could widen to about 10 a trillion even without any extra spending.
Intense cuts in expenditure could save some money, but even if a big axe is wielded on expenditures, the union government’s deficit this year would have to surpass twice the legal limit for an incentive that saves the economy from falling.

If this proves to be a year of negative growth, most likely it seems, implicating a revival will only get difficult. For pre-emptive action, the government should use its parliamentary authority to permit a limitless deficit for 2020-21.

Possibilities of inflationary tension and RBI’s mandate

An action to spend our way out of an economic swamp could prove inflationary if too much cash ends up chasing too few goods and services.
As we have undergone both demand and supply shocks, opinion is divided on whether prices will go haywire. This hazard would depend on how much cash gets pumped around at what point in time and the pace at which supplies are restored. In other words, the inflation outlook is highly unlikely.

But should prices threaten to rise, it would be inadequate for the central bank to tamp them down by fastening credit. As of now, RBI’s statute is to keep inflation at 4%, with a tolerance band of 2% on either side. This target is valid till March 2021 but needs to be reviewed right away to let the central bank focus on growth. The reasonable range could be broadened and the time limit to achieve the goal expanded as a special reprieve.

Conclusion

A few changes in the law must go along with calculations of a stimulus package formulated to relieve economic distress. The administration should act on these points quickly to save the day. Or else this huge nation of people living in the streets, dependant upon the unorganised sector to look after their well being could face the wrath of misery and destruction. A prolonged food security programme, targeted at the poorest of poor and pregnant women based in the rural set-up might go a long way to ensure the well-being of the citizens who are united to fight this dreaded pandemic despite being financially deficient.