THE STIMULUS PACKAGE – A “DHRISYAM” EFFECT

A deft, economically sensible policy maneuver puts PM Modi’s political capital at risk

A narrative repeated by different sets of people, repeated with precise regularity and doused with a generous cocktail of fact and fiction, is often perceived as the truth. That is the power of perception or the Dhrisyam effect . In a democracy, the way governments are able to shape perception can decide political outcomes. Our ruling establishment certainly did not want to overlook this aspect as it launched the soap opera of the stimulus package.

Faced with the macroeconomic situation before Covid, the options before the government were limited. Its strategy choice of favoring fiscal prudence thus cannot be faulted. Monetising the deficit, without a credible time-bound exit plan, would have complicated matters, potentially leading to currency depreciation, overseas debt, hyper-inflation, bank and business failures, asset bubbles, ratings downgrades, etc, as has been witnessed in Brazil and Argentina in the past.

Given its exorbitant privilege of owning the dollar as the world’s reserve currency, the risks of this approach of printing money are materially different for the US, even though it will never generate budget surpluses to repay the public debt it is amassing today.

The question is, who pays for it? Whilst the US will eventually pay for it by a boom-bust cycle — as opposed to via higher taxes or inflation — India has chosen not to go down that route. This is arguably a sensible thing to do, though the jury will be out in a few years on the impending bad debts in the banking sector arising out of the easy credit availability today.

So in its own way, India, too, has kicked the can down the road, as it simply did not have the finances and has chosen not to print money. It hopes that foreign and domestic capital will flow in, given the reform measures it has announced, and kick-start the economic cycle leading to employment and demand creation. Whilst this will take time, proportionate to the implementation efficiency on the ground through our famed bureaucracy, Prime Minister Narendra Modi is betting that by the time he is due for re-election in 2024 things will fall in place.

This is a legitimate gamble to take by an astute political mind — except for two interlinked issues. For a democratically-elected government, it is incumbent for it to give primacy to its citizens who are rendered homeless and without livelihoods. The migrant labour tragedy is a direct fallout of the unplanned lockdown — the world’s most stringent — implemented with a notice of four hours. Most of them are also involved in the micro, small and medium enterprises (MSME) sector whose existential crisis is on multiple fronts and will not be allayed by only a liquidity push.

This sector contributes 29 per cent to the country’s gross domestic product (GDP), employs 100 million people and lies at the core of solving our pre-COVID jobs crisis, as nearly half the employment generated globally is through this sector. Unfortunately, the devastating experience faced by the 140 million-strong migrant labour population during the lockdown will be a hugely limiting factor for their return to urban areas — which will hurt the ability of MSMEs to resume operations.

Our most vulnerable citizens have been left with below subsistence levels of income support from the state and making that worse is the sheer apathy of our bureaucracy towards them. Kalooram, a carpenter in our building, who travelled on foot from Bangalore to Rajasthan braving police atrocities, snakes and thugs, told me that he would “not forgive the government for ignoring us when we needed it most.” 

This feeling of neglect and wrath runs deep in a large section of people today. The exploitative nature of the relationship demonstrated by the business elite with this working class cannot be replicated by a democratic state. I would not take refuge in the delusion that the “silence of the lambs” is comforting simply as the country has not witnessed food riots and social unrest as predicted by economists.

The package did not even once touch upon this subject. At the very least, the government could have demonstrated its intent by promising legislative measures to ensure constitutional protection to the poor to prevent a recurrence of such a situation in the future. Given his stature as a mass leader, the prime minister’s promise would have softened the blow and sent a message to those in charge of implementation on the ground about the need to change their colonial mindset in the delivery of services to people.

Mr. Modi has repeatedly dipped into his seemingly inexhaustible reserves of political capital over the years to get away with many controversial schemes and policy actions, which lesser mortals would have succumbed to.

The urgent need to balance the medium term needs of the macro economy with the immediate challenges of the vulnerable is critical to our collective well being.

Unless urgent action is taken to address the immediate challenges, it is unlikely that the fountainhead of his political strength will be so forgiving the next time.

The original version appeared in The Business Standard print and digital edition dated May 21, 2020 as an Opinion Editorial on its Edit page >Article.

Business Standard May 21, 2020 : The EDIT page

(PRABAL BASU ROY)

A Sloan Fellow from the London Business School, Director and Advisor to Chairmen of corporate boards, the author has formerly been a Group CFO in various companies.

He is one of LinkedIn's Top Voices ; his views are frequently published in the national media on the intersection of current affairs, leadership and strategy with matters of finance, public policy, financial markets and corporate affairs.

Join me on Twitter.com @PrabalBasuRoy and feedback by email is welcome