The farcical Rupees (INR) 20 trillion ($265 billion) stimulus package

29 June by Sankha Subhra Biswas


Photo by shilpin patel from FreeImages

While the whole world is suffering from the Covid-19 pandemic with more than 10 million people affected by it, the economic crisis is more acute than ever. As a response, the governments of the developed as well as the developing countries came up with several financial stimulus to stabilize the markets. The Indian prime minister, Narendra Modi, in his 30 minutes speech, announced a stimulus worth INR 20 trillion. Looking at the breakup provided by the finance minister, Nirmala Sitharaman, it is amply evident that like its American and European counterparts, the measures are aimed to help out the capitalists and not the millions suffering in the streets.

Since the beginning of the crisis, the Reserve Bank of India (RBI) expressed its desire to buy corporate bonds Corporate bonds Securities issued by corporations in order to raise funds on the Money Markets. These bonds resemble government bonds but are considered to be more risky than government bonds and other guaranteed securities such as Mortgage Backed Securities, and therefore pay higher interest rates. to stabilize stock markets and also reduced the repo rate by a massive 75 basis point to facilitate private corporations to avail cheaper loans to buy back their own shares in order to push share Share A unit of ownership interest in a corporation or financial asset, representing one part of the total capital stock. Its owner (a shareholder) is entitled to receive an equal distribution of any profits distributed (a dividend) and to attend shareholder meetings. prices up. However, these attempts proved insufficient to stabilize the market. By the end of April, it was clear that the stock markets were far from any stabilization. Narendra Modi, in his speech, asked India to be self-reliant and overcome the situation but the announced stimulus has little potential to resolve the crisis as it does not seek to address the real issues.

The economic topsy turvy
Even before the pandemic, the Indian markets witnessed several shocks in the last few years. The major luxury goods were suffering from a demand crisis and the pandemic only sharpened it. The IBBI’s newsletter on bankruptcy and insolvency reckoned that there were 115 real estate companies under the corporate insolvency resolution process at the end of September 2019 due to a demand crunch. The real estate crisis hit the whole NBFC sector and put it at stake. The IL&FS crisis provided enough signs that the whole NBFC sector is living on the volcano and the bubble can explode at any point of time. The whole of 2019 suffered from a liquidity Liquidity The facility with which a financial instrument can be bought or sold without a significant change in price. crisis for the NBFC sector as the money lent to the sector was not coming back to lend it further.

In August 2019, automobile sales dipped by a record 23.55%. Major luxury goods manufacturers ended their balance Balance End of year statement of a company’s assets (what the company possesses) and liabilities (what it owes). In other words, the assets provide information about how the funds collected by the company have been used; and the liabilities, about the origins of those funds. sheet with a negative balance. Even the inequality was increasing day by day. The 2019 Oxfam report reckoned that “there are 119 billionaires in India. Their number has increased from only 9 in 2000 to 101 in 2017. Between 2018 and 2022, India is estimated to produce 70 new millionaires every day” but “many ordinary Indians are not able to access the health care they need. 63 million of them are pushed into poverty because of healthcare costs every year - almost two people every second” and “it would take 941 years for a minimum wage worker in rural India to earn what the top paid executive at a leading Indian garment company earns in a year.”

Therefore, it is clear that present crisis is nothing but a mere reflection of the capitalist crisis and the current stimulus can’t help them out as it fails to address the issue of demand gap. However, this stimulus will definitely make capitalists richer but they are not going to invest their extra profits in productive investment. They will either hoard it or put it into speculation to make more profits or lend it back to the poor through mortgages. As a result, the household debt will spiral up and a demand crisis will hit the market in no time. The whole stimulus is aimed to ensure capitalist profits coated in a pro-poor rhetoric. Although the “fiscal stimulus” spared a few bucks in the name of the poor, symbolically, but the whole exercise is nothing but a determined approach to rescue the capitalists.

The benefits of the much hyped package seems to be a mirage. For example, the government, announced a INR 3 trillion collateral Collateral Transferable assets or a guarantee serving as security against the repayment of a loan, should the borrower default. -free loans to the MSME sector, having a 4-year tenure and 12 months moratorium; INR 300 billion liquidity facility for NBFCs, housing finance corporations, and micro finance institutions; INR 450 billion partial credit guarantee scheme 2.0 for NBFCs. These might be aimed to help the productive sector, but where are the takers?

The crisis deepens
The production/manufacturing sector is closed for almost 50 days, most workers do not have a job and lockdown 4.0 won’t allow them to travel to their workplace due to restrictions. So, the Indian economy has entered a vicious cycle of demand-supply crisis.

Due to lockdown 3.0 till mid-May, major sectors have suffered from severe demand crisis as people can’t afford their daily necessary goods because they don’t have any income. Such major sectors like airlines and hotels have already faced a plunge in demand of 70-75%, automobile demand reduced by 50-60%, real estate demand plummeted by 50%, according to a report published by McKinsey & Company.

Another report by The Economic Times states that the oil demand has slumped by 70% and energy demand suffered a 26% drop from March 18th vis-a-vis the previous ten days due to a complete shut-down in production. The same Mckinsey report predicted several possible scenarios and in case of scenario 2 (see the infochart below), the economy could contract sharply by around 20 percent in the first quarter of the fiscal year 2021, with a 2-3 percent growth for the fiscal year 2021. Here, the lockdown was estimated to continue roughly in its current form until mid-May 2020, followed by a very gradual restarting of supply chains. This could put 32 million livelihoods at risk and swell NPLs by seven percentage points. The cost of stabilizing and protecting households, companies, and lenders could exceed INR 10 trillion (exceeding $130 billion), or more than 5 percent of GDP GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
and if the lockdown is extended by few more weeks the contraction of the economy will increase upto 8-10 percent for fiscal year 2021.

Due to this economic contraction, a lot of people will lose their jobs. Around 27 million youth in India have already lost their job in April and a study conducted by a group of researchers from Azim Premji University revealed that 84% of the self-employed lost their employment and 76% of salaried workers and 81% of casual workers have lost their job as the production shut down for last 50 days and workers have no way to earn money. The job crisis has put the whole country in a severe demand crisis because instead of production the companies have invested more in market speculations. This shift from productive investment to speculative investment will further aggravate the crisis.

The US stimulus generated optimism reigns in global stock markets. After falling around 30% due to Covid-19 pandemic, the US stock market jumped back 30% again in April as the US Federal Reserve FED
Federal Reserve
Officially, Federal Reserve System, is the United States’ central bank created in 1913 by the ’Federal Reserve Act’, also called the ’Owen-Glass Act’, after a series of banking crises, particularly the ’Bank Panic’ of 1907.

FED – decentralized central bank : http://www.federalreserve.gov/
pushed a humongous amount of liquidity in the market through buying up bonds and other credit instruments. There is also a hype as it’s believed that the US’ lockdown will be over soon. The same thing happened in India. The economic slowdown was affecting India for the last few years and this Covid-19 recession caused turmoil in the market, but unfortunately the major Keynesian economists are not ready to accept this recession as a crisis of capitalism. Paul Krugman reckons this economic crisis as “a natural disaster, like a war, is a temporary event”.

Robert Reich, a leftist economist, described this as a health crisis and not an economic one, and as soon as the health problem is contained the economy would snap back. Nobel laureate Abhijit Vinayak Banerjee and Esther Duflo asked the Indian government to announce financial stimulus to help the poor until the recession resolves. For Keynesian economists, the present crisis is nothing but a seasonal crisis like the one that happened in the tourism industry.

The mainstream economists indulged themselves in a silly argument to characterise whether this crisis is a “demand shock” or a “supply shock” but they are not ready to accept this as an inevitable capitalist crisis and consider Covid-19 as a mere catalyst. As production halted for two months, investment has vanished and trade fell to nadir, the income of the working class, including a section of the white-collar employees, fell considerably. This created a demand crisis, which will continue for a long time and it will further reduce supply as the capitalists will reduce production due to low demand. This is a vicious cycle and will create more unemployment. This is indeed how a capitalist crisis takes place. Though the government thought about stabilising the economy with a “fiscal stimulus” package, which is a credit package for capitalists, it’s never going to work as the capitalists faced a plunge in the rate of profit Profit The positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders. for the last few years and any short time survival packages can’t revive this system any longer.

A report carried out by the International Monetary Fund IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

http://imf.org
(IMF), authored by Valerie Cerra and Sweta C Saxena, reckoned that the capitalist growth never reaches the old peak after a recession.

In the same report, the IMF also argued that this does not only happen to a single economy but it happens to the rich and poor country. The IMF “Poor countries suffer deeper and more frequent recessions and crises, each time suffering permanent output losses and losing ground (solid lines in chart below).”

The World Health Organization (WHO) has already announced that discovering a Covid-19 vaccine is a distant possibility and there is a good probability of a new wave hitting soon. A new wave of lockdown will cause another slump in the global economy and it will cause a severe economic stagnation as well. If this happens, then all the stimulus, provided already, will go in vain and capitalists will ask for another new set of stimuli for their revival.

It’s not a hollow estimation but the structural reform measures announced by the government, like allowing more foreign direct investment (FDI), dilution of labour laws, coal and mineral mining liberalisation, etc, are a clear indication of government desperation to start the production with all possible anti-people and pro-corporate plans to take the economy back to the old track.

The attack deepens
Since a long time, the Modi government has been trying to amend the labour laws and do away with the hard-won rights of the working class. Under the garb of reviving the post-Covid-19 economy, the ruling classes have relaxed the labour laws in major states like Assam, Gujarat, Madhya Pradesh, Punjab, Rajasthan, Telangana, etc. The Modi government has also announced that no case can be lodged against the owners of the company if they do not pay their workers full salary. Even the Supreme Court of India has spoken in the same tone in a verdict. After tampering with labour laws, the Modi government will try to enact the notorious land acquisition act, which was kept in the cold storage since 2015, following a massive nationwide upheaval against it.

Although the Modi government tried its best to regain the faith of the capitalist it nevetheless, failed in its aims. The corporates eventually categorised this stimulus as a short-time revival package that will not help India to solve the existential crisis. Few can argue that the government’s approach to increasing FDI and coal block auction and other pro-corporate steps will regain the faith of the capitalists shortly but it seems difficult, at least temporarily. Even after the announcement of the much-hyped “fiscal stimulus”, foreign investors sold shares worth over a billion dollars in just four days, from May 12th to May 16th.

Hence, it is clear that the crisis is not just a mere demand crisis or supply crisis but an obvious outcome of how the capitalist system functions and stimulus is nothing but a mere temporary approach to jumpstart the economy. The desire to gain more profit by a handful of super-riches is capitalising the probability of collective crisis and the Modi government is helping them with a fiscal stimulus to save the system.



Sankha Subhra Biswas

The author is a political activist and member of Collective for Economic Justice (CEJ)

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