Government should borrow more and increase spending, says P Chidambaram

Chidambaram lists four steps the government can take to mitigate the suffering of the poor and the lower middle-classes

The Modi government must revive demand in the economy through a generous fiscal stimulus and support low-income and poor families through cash transfers, says former finance minister and Rajya Sabha member P Chidambaram in an interview with DH's Annapurna Singh. He talks at length about the government’s handling of the Covid-19 pandemic.

Q. What are your comments on the government’s handling of the Covid-19 situation so far?

A. The government’s record of handling the pandemic, especially the second wave, has been a disaster. Every decision or non-decision was a grave misstep. To list a few, the government prematurely, and wrongly, declared that it had defeated Covid-19 at the World Economic Summit when the second wave was just around the corner. Second, much of the healthcare infrastructure that had been built during the first wave was dismantled, Covid Care Centres were closed, the number of testing slowed down, and so on. Third, no attempt was made to assess the demand for, and the supply of, vaccination doses. Assessing the demand was simple arithmetic but it turns out the government did not know how to count!

The government had no clue that to fight the pandemic, apart from vaccines, the country would require oxygen, medicines (such as Remdesivir), tankers, ventilators, ICU beds, etc. There was no plan to augment the supply of these essentials. The first order on domestic producers was placed only on January 11, 2021, while other large countries had placed orders and pre-booked the production in May-June 2020. The size of the first order was a paltry 1.1 crore doses when the requirement was for over 200 crore doses!

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The first payments to the two domestic manufacturers were made only on April 19, 2021. No vaccine other than Covishield, Covaxin and Sputnik V was given approval under the mistaken notion of Atmanirbhar Bharat and, to the best of my knowledge, none has been approved so far.

Last but not the least, all powers were centralised under the National Disaster Management Act and the Epidemic Act and there was little or no consultation with the state governments.

Q. As the second Covid-19 wave appears to be ebbing, what kind of support do you think the government should extend to businesses to start afresh?

A. The only answer to a fall in demand and consumption (a recession) is to boost demand through a generous fiscal stimulus. Monetary policies such as keeping the bank rate low or infusing liquidity have limited utility. The heavy lifting has to be done by the government on the fiscal side. This, the government failed to do, despite every economist of repute advising the government to increase spending. I do not believe money was a constraint. The government had the option to borrow more and enlarge the fiscal deficit. If, at any point, the government was convinced that the fiscal deficit had become too large, it had the option to monetise part of the deficit. Dr Abhijit Banerjee, Nobel Laureate, among others advocated that course.

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As far as helping businesses — especially MSMEs — the government’s response was too little too late. Even in the first wave, many thousands of small and medium businesses had closed down and the second wave put the lid on the closure. I doubt if many of the closed units will open again. The government’s ‘Credit Guarantee Scheme’ is a pale shadow of what was intended and what was announced and what was understood. The guarantee is not for Rs 3 lakh crore, as was believed, but the total credit offered will be Rs 3 lakh crore. Even that amount has not yet been fully availed of despite nearly a whole year having passed. The reason is that many MSMEs are bankrupt, their balance sheets are not credit-worthy, and no banker will lend them money (especially when the CBI and ED are looking over their shoulders). In sum, the government has no plan to revive the MSME sector. The unemployment figures are a testimony to the number of units that have been closed.

Q. Some have suggested the RBI print money and finance the government. Do you think it can have costly macro-economic implications? What is the alternative?

A. Of course, there are implications but it is the business of the government and the central bank (RBI) to manage the consequences of a large fiscal deficit and partial monetisation. Why should the sovereign have the power to create money if it will never use it? During the international financial crisis in 2008, many countries of the world saved their economies by adopting ‘unconventional’ policies. The nations managed the consequences, emerged out of the Great Recession, and are now strong economies. Given the current situation, there is no alternative to borrowing more and spending more.

Q. What are your thoughts on the Universal Basic Income to Indians and whether it will help fight Covid-19 blues?

A. The emphasis is not on Universal but on Basic Income. Low-income and poor families must be supported through cash transfers. Every major economy, including the US, is transferring cash to the poor and even the middle class. In the present situation, India should transfer cash to the bottom one-third of families, that is approximately eight crore families benefiting about 40 crore people.

Q. Retail inflation has now breached the 6 per cent comfort level of RBI. Not only food and fuel but also the core inflation has risen to an 85-month high in May. What according to you is the reason for such a spike and what should the government do to control that?

A. The principal reason is the repeated hikes in fuel prices. Fuel prices have a cascading effect and impact every aspect of the economy, every good and every service. The people are paying a price for the greed of the government that knows of no other way to raise resources. Besides fuel price inflation (a whopping 37.61 per cent), there seem to be production constraints, supply disruptions, and hoarding and black-marketing. Pulses inflation is 9.39 per cent, edible oil inflation is 30 per cent. All these points to incompetent economic management.

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The immediate remedy is to reduce the taxes and cesses on petrol and diesel and other fuels. Fuel prices will soften and that will have a beneficial impact on both WPI and CPI. Next, the government should address the supply and distribution constraints.

Q. How can the government shield the poor and the lower middle-class households from rising prices?

A. The poor and the lower middle-classes can be protected to some extent only through cash transfers. Please remember, there is only MGNREGA (that Mr Modi ridiculed and despised) that is putting cash in the hands of families among the rural poor. In the absence of any similar programme for the urban poor and the non-manual workers among the poor, the only option is cash transfers.

A reduction of indirect tax rates such as GST on a larger number of goods and services, at least for six months, would be a good step. Large and liberal free rations using the huge stocks of grain is another step the government should take immediately. The fourth step is to fill, on an emergency basis, all the vacancies in government and semi-government bodies and institutions. These four steps can mitigate the suffering of the poor and the lower middle-classes.