Over five phased announcements last week, the Indian government set in motion an unprecedented fiscal stimulus. Gaurav Dalmia looks at India’s near-term economic challenges and offers a prescription on how privatisation can help India achieve its objectives.
India’s fiscal stimulus has generated much debate. A strong stimulus package would risk busting the Indian government’s finances, along with the attendant downward macroeconomic spiral. A weak package would likely mean a long and protracted slowdown, and economic mortality – of small businesses and jobs. The confounding question remains: what should have been the delicate balance?
Backdrop: India’s Unique Vulnerabilities
Having imposed one of the world’s most severe lockdowns, there was an imperative to keep a steady hand on the economy. Top government brass engaged extensively with business leaders and other stakeholders. India’s position is particularly vulnerable. Both Goldman Sachs and Noumra forecast around 5% shrinkage in India’s GDP. India’s 63 million micro, small and medium-sized businesses make up 28% of India’s GDP, 45% of manufacturing output, and employ 25% of the workforce. Yet, they are informally funded and lack cushions for a severe downturn. Of the total $625 billion capital needs of Indian business, banks and NBFC’s provide less than 30%. The rest comes from friends and family and informal channels. A bloodbath in small businesses will be particularly brutal.
The vivid images of helpless migrant workers making their way back home hundreds of miles away on foot has already shaken the national conscious. It is estimated that India has 65mm inter-state migrants. Of this, 33% are workers, mostly from the poor eastern states, working in industrial and business hubs in the west, north, and south, and more than half of these are on daily wages or in the informal sector.
India’s unemployment rate shot up to 27.1% in early May. Data from The Centre for Monitoring the Indian Economy showed that India shed 122 million jobs; 90 million of were small traders and labourers, probably sole breadwinners for their families. Almost a third of India’s 267 million households face economic uncertainty. Many are likely to fall into despair.
Additionally, India may not be able to capitalize on a post-crisis uptick. Businesses will discover parts of their ecosystems are financially chocked. As successive world markets gradually get back to normal, Indian businesses will face a competitive disadvantage if it doesn’t address the imminent supply side constraints.
Government Action: A Large but Skewed Stimulus
An economic turnaround needed a significant counter-cyclical capital trigger. India’s consolidated fiscal stimulus package — including government spending, tax relief, credit enhancement, and liquidity provision — is now $280 billion or 10% of GDP, focused on agriculture, infrastructure, small businesses, middle class, and labour. This has been accompanied by significant reform announcements, particularly in agriculture, mining and defence. The stimulus is an outlier amongst emerging markets, and nearing the stimulus levels of western economies. When the first announcement was made, businessmen, TV anchors and the stock market cheered in a gesture of a pent up emotional release!
The composition of India’s stimulus is very different though. In order to better understand the effect of the stimulus package of various countries on their respective economies and implications for business, Bruegel, the noted Brussels-based think tank, categorises every country’s discretionary fiscal measures into three groups. Immediate Fiscal Impulse comprises additional government expenditure and forgone revenues. Deferrals include postponement of social security contribution or taxation, thereby giving short term relief to businesses and consumers. Liquidity Provisions consist of credit lines and guarantees, which create contingent liabilities for the government and may turn into actual expenses later.
Most countries have focused on the Immediate Fiscal Impulse. Weightage of this segment in China’s stimulus is 67%, it is 63% for the US, 60% for Indonesia and 89% for Brazil. For India, this number is 12% and the stimulus is heavily weighted towards Deferrals and Liquidity Provisions. A noteworthy initiative was direct-benefits-transfer of $4.8 billion to 160 million people within the first two weeks of April itself in the wake of the Covid-19 outbreak and associated lockdowns. But, given the needs of an economy of India’s size, the stimulus is not likely to have a big bang impact for an economic turnaround, and will be more like a cushion. Not surprisingly, the mood waned as the details were revealed in five instalments over the past few days.
The skewed aspect of India’s stimulus reflects the no-free-lunch nature of the world and India’s unusual circumstances. Historically, transcending governments of all ideological hues, India’s deficit has been more structural than cyclical, with inadequate reserves created on the government balance sheet during boom times. As a result, while India’s total debt to GDP ratio is quite healthy when compared to its peers, its government debt to GDP is alarmingly high: 70% of GDP for India as compared to 47% for China, 44% for Thailand, 42% for the Philippines, and 33% for Indonesia. India’s credit rating is already borderline junk: BBB- by Standard & Poor and Fitch and Baa2 by Moody’s. A one notch downgrade can be a step function: the rupee would likely take a big hit and credit spreads for Indian paper will spike. When leaving office, Bill Clinton remarked he wanted to come back as the bond market, because it can spook governments. A lack of stimulus can be slow death; a poorly financed stimulus can mean a free fall.
Privatisation: An Economic Imperative
In my discussions with government leaders, I have emphasized India’s privatisation potential, because of its efficiency, its magnitude, its effect on controlling the deficit and providing firepower for potent demand-generating initiatives.
The efficiency argument is normally underestimated. Economists Vijay Kelkar and Ajay Shah calculate that India’s marginal cost of public funds – lost GDP, compliance cost, and financing distortions – is Rs 3 for every Rs 1 spent.
On the other hand, just the government stake in the listed public sector companies that constitute the Nifty Index is worth $85 billion. Add the Railways, Life Insurance Corporation, other private PSUs, and surplus land of government bodies, and there’s an additional $300 billion of government-owned assets to be selectively harvested.
In this regard, three types of issues crop up: philosophical dilemmas, political ramifications and economic impact. India’s leaders are concerned about wholesale privatization and its impact on energy security, financial savings and employment. They worry about disenfranchisement of the underprivileged voter, who tend to vote in blocs, and pressures for interest-group led distribution of the proceeds. On one end, they are anxious about timing and value maximization, and on the other end, they fret about ongoing political interference, inherent inefficiency and gradual marginalization of government-owned businesses that has happened in metals, telecom and banking.
Managing the crisis is like walking a high altitude tightrope. The plan must incorporate balance, courage, and astuteness. In long distance bicycle racing, cyclists group together in pelotons. Occasionally, some cyclists break away from the pack to take a lead. Research shows that those who break away during an uphill climb are most likely to sustain their lead. To strive for victory, countries must pedal purposefully and hard.
Gaurav Dalmia is the Chairman of Dalmia Group Holdings