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Stringent lockdown, conservative fiscal policy were mistakes, it is time to reverse both: Swaminathan Aiyar


By Tamanna Inamdar

Nirmala Sitharaman said there are plenty of months left in the year. We can still get the fiscal push please. Go ahead and give that fiscal push and push the money out to people through the various routes, says the Consulting Editor, ET Now.

In the last six months all the policy decisions and the speed with which India’s positive cases has grown has had a direct bearing on the economy. How do you look at the current situation where we are planning to open up more even as cases are mounting?
I would say that this was not a question of public health policy, this is a political decision. There are trade-offs always between what to do on the health side and what to do on the economic side and this is a political decision on which all of us are entitled to pontificate because it is a political matter.

India opted for the most stringent lockdown on a certain Oxford Research Index and one of the smallest fiscal stimulus of less than 2% of GDP. The combined result was the biggest fall in GDP. And did you solve the health problem? I would say that it was a mistaken political decision in terms of the tradeoff. The very stringent lockdown was put in place on the ground that this will help reduce the spread of the infection and give us time to gear up for a very large number of cases. Other countries were able to do justice on that front with much less stringency and with a much larger fiscal stimulus. So I would say on both those two counts the policy was misinformed, the policy was wrong.

At that time itself, I wrote that this support that you are trying to give to the poor and the public is peanuts. How can this kind of strict lockdown work in a country where people are sleeping 6 to 10 to a room where there are extremely crowded gullis (lanes) and where it is really impossible to abolish contact. Yes, you can try to reduce contact in some places but in other places, it is physically impossible to practice social distancing in Indian conditions. Therefore I would say that it was a mistake to have a stringent lockdown, it was a mistake to have such conservative fiscal policy and it is time to reverse both.

I have been saying this for last several months and I can only repeat it once again. There is still plenty of time. Nirmala Sitharaman said there are plenty of months left in the year. We can still get the fiscal push please. Go ahead and give that fiscal push and push the money out to people through the various routes, I would have included all of them. I would include directly giving it through the Jan Dhan accounts, PM Kisan, MNREGA, additional infrastructure — all of those and do not worry that much about the fiscal consequences.

As far as the lockdowns are concerned, frankly they have not worked. So you need to focus on minimising lockdowns rather than maximising stringency. If you do this, we will gradually recover but it is very clear that compared with various other developing countries, we have suffered a much bigger fall. We now need to get much faster recovery. While there are some signs of recovery, it is not as strong as in some other countries. China, of course, is way ahead of everybody else. So I would say yes we got it wrong, please reverse those policies, let us have the minimum lockdown and let us have much much more fiscal spending.

Why do you think that there is this hesitation to spend for this fiscal push?
The economic reason given is that there are doubts as to whether people are in a spending mood and if you push money out, perhaps people would not spend. I understand that the precautionary motive will be longer but still that would apply to countries across the board and nevertheless countries have done it. So yes, all the money would not be quickly spent but nevertheless to need to push it out, there are some talk of how you can give it in the form of vouchers that will expire in one week or expire in one month so that people have to spend that money or they do not get it. However, we are not administratively in a position to reach the bulk of the population.

Secondly, there was this concern about what happens to our debt GDP. If we have this huge fall in nominal GDP and a huge rise in debt, we have already crossed perhaps 90% in terms of debt to GDP, our interest rates are among the highest in the world. So, 90% of GDP for us is much higher than for the USA or UK or for China.

On the fiscal side, there was this conservatism of are we getting the debt to GDP too high here? I would say let it go and while inflation is not normally considered a good thing, please remember inflation is also to some extent solving the problem of debt to GDP because nominal GDP will be rising with the inflation. I would say the reasons why the government has been conservative is they were worried about whether or not you can spend the money, secondly they are worried about what is the impact on government debt I think both of these are highly exaggerated concerns. We need to break out of that mode and think much more boldly.

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