Government interventions

Context – The Government’s core belief in ‘minimum government’, which ties its hands when it comes to fiscal measures even in such harsh economic conditions.

What are the reasons for the failure of stimulus packages?

  1. Lack of Demand– The aggregate demand for goods and services again is dependent on the income and purchasing power of people, which has come down drastically, at the aggregative level, due to the COVID-19 lockdown.
  • Nothing to stimulate demand – many economists have opined that the government stimulus tries to resolve only supply-side issues. There is nothing to generate demand. This could only be done by putting money in the hands of people.
  1. Risk of taking housing loans – Though the consumer or housing loans are easily available at lower rates of interest, still people are not taking the household loans, as they are in doubt of their future incomes or dwindling current one.
  2. Bank burdened with bad loans- On the supply side, the big constraint on fresh lending is the burden of non-performing assets (NPAs).
  3. Credit easing will not work immediately– Credit easing by the RBI is not direct government expenditure and banks will be hesitant to lend the money available with them.

What are the possible solutions?

  1. Relax FRBM target– Fiscal Responsibility and Budget Management (FRBM) should be kept in a state of suspension for both Centre and the States.
  2. Cash transfer to Households– The government needs to announce a ₹10 lakh crore fiscal stimulus package providing universal food ration and cash transfers for households in order to revive the economy at this time.
  3. An urban employment guarantee law– This could help improves worker incomes and have multiplier effects on the economy.
  4. Improving health infrastructure– The government needs to build a robust public health infrastructure on the principle of public provisioning instead of walking down the insurance route.
  5. Investment in Green Deal- – A comprehensive green deal can be planned, which changes the energy mix of the economy and also makes the poor and the marginalized a part of a sustainable development process.

Way forward-

The current COVID-19 pandemic has given an opportunity to rethink of health, economic and climate policies.

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