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LATEST NEWS UPDATES | With its economic policy, the government confronts political risks -Roshan Kishore

With its economic policy, the government confronts political risks -Roshan Kishore

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published Published on Jun 29, 2021   modified Modified on Jun 30, 2021

-Hindustan Times

Those sympathetic to the establishment argue that had it not been for the second wave, the economy would have been in a much better shape. Those who disagree claim that even the sequential recovery which was achieved was profit-led and inequality-generating in nature

On June 28, finance minister Nirmala Sitharaman announced an economic package to deal with the adverse effects of the second wave of the pandemic. The contours of the package are similar to what was announced last year when the pandemic first erupted.

The actual fiscal cost is only a fraction of the headline number attached to the package. The bulk of the support is in the form of credit guarantees, which means the government only pays in case there is a credit default. This approach is different from what most major economies have adopted, where the fiscal component was a much bigger part of the stimulus.

Will this approach work? This question is best addressed by asking another question. Did the policy response to the first Covid-19 wave and the nationwide lockdown work?

Unfortunately, it is difficult to arrive at a definitive view on the latter. Those sympathetic to the establishment argue that had it not been for the second wave, the economy would have been in a much better shape. Those who disagree claim that even the sequential recovery which was achieved was profit-led and inequality-generating in nature.

This question can be approached in another way. What does a programme of credit guarantee for distress-ridden sectors seek to achieve? The short answer is that it offers a low cost option to a firm to prevent going bankrupt in the short-term. But it is also important to keep in mind the main reason for the distress — a harsh lockdown completely disrupting business, and deficient demand (which predates the pandemic). This means that unless there is a revival of demand, repeated credit guarantees to protect distress-ridden business is tantamount to kicking the can down the road.

The government, while choosing to offer credit guarantees rather than direct fiscal stimulus, is banking on recovery of demand by the time the loans have to be paid back (or written off). Is the government on the same page with private capital on this question? Results of listed firms do not suggest this (see https://bit.ly/3hkGV9D for details). While their profits surged, companies have used the money to deleverage (reduce debt) rather than undertake fresh investments. This implies that companies do not see the need to create more capacity to cater to what could be extra-demand in the future. The economic shock of the second wave, both for businesses and household finances, has made things worse on this front.

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Hindustan Times, 29 June, 2021, https://www.hindustantimes.com/opinion/with-its-economic-policy-the-government-confronts-political-risks-101624971977514.html


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