Three Big Questions About India's Economic Stimulus
Plus, India enters Lockdown 4.0, Gen. Naravane's comments on India-China clashes, and the debate on India's nuclear doctrine.
Hi there, I’m Aman Thakker. Welcome to Indialogue, a newsletter analyzing the biggest policy developments in India. The aim of this newsletter is to provide you with quality analysis every week on what’s going on in India.
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A Deep Dive Into India’s Long-Awaited Stimulus Plan
After weeks of waiting, Prime Minister Modi addressed the nation on May 12 to outline his government’s stimulus package to combat the economic downturn caused by COVID-19. The brass tacks are that the government will release a “special economic package” to create a AtmaNirbhar Bharat or a "Self-reliant India.” The total economic package, which includes previously announced measures by the government, will total Rs. 20 lakh crore ($266 billion). This number equals around 10% of India’s GDP (although it’s not so straightforward for reasons we’ll get into shortly).
In the days that followed the Prime Minister’s speech, Finance Minister Nirmala Sitharaman announced the finer details of India’s economic package over multiple days and through five parts. These five parts include a grand total of 50 individual policies, ranging from equity infusion to micro, small, and medium-sized enterprises (MSMEs), to amending India’s Essential Commodities Act to affordable housing for India’s migrant laborers. You can read the fine print of each individual part of the packge here:
However, to best analyze this economic package, I will not analyze each of the 50 policy developments. Rather, I will ask three big questions to understand what this package means for India
1. How much money is actually being spent?
The headline number of India’s economic package has been Rs. 20.9 lakh crore or $266 billion. The government’s official breakdown of the spending is available here. However, there are a number of caveats to that number. First, the number includes previously announced measures from the government, including the first fiscal package worth Rs. 1.70 lakh crore or $22.6 billion (0.8% of GDP), as well as liquidity measures by India’s central bank, the Reserve Bank of India, totaling Rs 8.04 lakh crore or $107 billion.
Therefore, the new measures would actually be worth ~ Rs. 10.6 lakh crore ($136.4 billion). However, even this number needs to be scrutinized further. Firstly, a number of the government policy announcements, across the five parts, included several measures that the government had already announced. For example, the reforms announced in the power sector and the civil aviation sector included policies and agreements that were already underway before COVID-19 hits India. Secondly, the total spending of the government may also be lower than expected. As the P. Vaidyanathan Iyer of The Indian Express notes:
Much of the Rs 20 lakh crore Covid-19 economic package announced by Prime Minister Narendra Modi on May 12, and elaborated by Sitharaman over five consecutive days beginning May 13, has been liquidity driven, with little burden on the Central exchequer. It has been primarily aimed at pushing banks to extend credit on the back of government guarantees to sectors that fuel the economy — small businesses, non-banking financial companies, micro finance institutions and housing finance companies.
Iyer went to note that the total new spending was really close to 1.1%. Other sources, including HSBC India, confirmed that the total actual spending would be around 1% of GDP.
To be very clear, the Prime Minister and the government were sure to say that this is an “economic package,” and not a “fiscal stimulus,” so the low levels of government spending aren’t a problem. However, touting the package as being worth 10% of GDP has led observers to believe that the government is spending 10% of GDP, just as other countries have spent on fiscal stimulus. This is just to show that that is not the case at all.
2. How effective is this economic stimulus likely to be?
Given the particularities of such liquidity-first, low-spending economic support package, will the package be effective? Early indications suggest a mixed bag.
The efforts to provide liquidity to MSMEs and to look at longer-term reforms in agriculture have been welcome by some corners. Indeed, MSME’s contribute to nearly 48% of India’s GDP, and ensuring that they receive adequate liquidity to ensure their survival post-COVID-19 is crucial.
However, there are a number of ways that the package leaves much to be desired. The first is that while longer-term reforms, such as those on agriculture, civil aviation, defense, and space are welcome and have the potential to spur future growth, they do little to address the immediate crisis from COVID-19. While some analysts suggests this is a deliberate recognition on the part of the government to accept the short-term downturn in growth and focus on longer-term fundamentals, not addressing the immediate concerns directly can result in millions of livelihoods, and lives, ruined.
Finally, the government’s utter neglect for the plight of India’s poorest and most vulnerable has continued in this economic stimulus. After not doing nearly enough to address the plight of migrant workers who did not factor in to the government’s lockdown decision and who were forced to walk hundreds of kilometers after being denied other avenues to return home, there was very little in the economic package for these individuals.
While economists, researchers, and opposition politicians demanded that the government include direct cash transfers to the poor to the tune of Rs 5,000 - Rs 7,000 ($65-$92), the government has refused such an approach saying, “There are many ways to address the problem. What we did will have greater impact.” The result is the government has either advanced spending it was going to give farmers later (such as under the Pradhan Mantri Kisan Samman Nidhi), or has moved money out of other funds (rather than allocate new spending), such as from the Building and Construction Workers’ Cess Welfare Fund for stimulus construction workers.
The lack of direct support to these most vulnerable will inevitably mean a dampening of the government’s efforts to shore up demand as part of India’s post-COVID-19 economic rebound. And at a time when India’s economic forecasts are getting worse and worse, this impact of this mis-step is likely to be particularly adverse.
3. What does the slogan of “Self-Reliant India” mean for India’s economic engagement with the world?
Finally, with the emphasis of, both, the Prime Minister and his Cabinet on “self-reliance,” is it likely that we’ll see more protectionism from India moving forward. Government ministers have gone to pains to say that that is not the case. For example:
However, it’s important here to separate the rhetoric from actions. Over the last six years, we’ve seen India say the right things, and do the wrong things when it comes to integration and deeper engagement with the world economy. Prime Minister Modi famously spoke at the 2018 World Economic Forum in Davos in defense of globalization. He argued that while, “instead of globalization, the power of protectionism is putting its head up,” protectionism is not the way forward. However, shortly after his speech, his government’s budget introduced new tariffs and custom duties. Since then, it has only been a trend of raising barriers, be it steps against foreign e-commerce companies or withdrawing from the Regional Comprehensive Economic Partnership.
Is is possible this time is different? Sure. But it’s hard to make that case when the gap between action and rhetoric has been so lopsided in favor protectionist action.
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India Extends Lockdown Till May 31
India has been under lockdown since March 24, and after two extensions to the lockdown, it was slated to end on May 17. However, hours after the lockdown was slated to end, the government announced that the nationwide lockdown — with varying levels of restrictions across districts classified as green, orange, or red — will continue until the end of the month. Areas with high concentration of cases will also continue to be marked as containment zones.
However, some things will change, chiefly that the government will devolve to India’s states and union territories the power to designate which districts within their jurisdiction should be classified as green, orange, or red. While containment zones will continue to face harsh restrictions (with only essential services allowed), other zones will see activities previously banned start to open up. These include non-essential e-commerce deliveries, barbershops, and liquor shops among others. Activities such as flights, religious gatherings, public transport, and others will remain banned nationwide.
A full breakdown of activities allowed in each type of classification is below:
The Debate in Academia over India’s Nuclear No-First-Use Policy
There has been an ongoing debate between academics in International Relations/Security Studies on whether or not India is diluting its “No First Use” (NFU) doctrine when it comes to nuclear weapons. This week, that debate was reignited.
The debate finds its roots in a paper published by Dr. Vipin Narang, Associate Professor at the Massachusetts Institute of Technology, and Dr. Christopher Clary, Assistant Professor at the University at Albany, titled “India’s Counterforce Temptations: Strategic Dilemmas, Doctrine, and Capabilities,” which was published in International Security. The full, un-gated paper is available here.
Their paper argues that India has been investing in capabilities “that exceed what is required for a strictly retaliatory nuclear arsenal,” and possibly shifting to a “counterforce strategy.” Such a strategy would mean India could pursue a strategy where it conducts a preemptive, or first, nuclear strike against Pakistan’s longer-range nuclear systems, taking them out first in a conflict. In addition to tracking India’s investments and changes to India’s nuclear force development, they also point to “a growing number of statements by recent Indian officials offered in a private capacity while serving or shortly after retirement that call into question India’s NFU commitment and demonstrate interest in being able to execute disarming attacks.”
Their argument has attracted a lot of flak, specifically by Indian scholars, who maintain India is not pulling back from its NFU doctrine. The most direct response came this week from Dr. Rajesh Rajagopalan, Professor at Jawaharlal Nehru University, who argues that Dr. Narang and Dr. Clary’s evidence is unconvincing, and that why there are other, more convincing reasons for India’s investments in key nuclear and missile technologies that do not suggest India is pursuing a counterforce strategy, nor that India is diluting its commitment to NFU. You can read Dr. Rajagopalan’s paper, published for the Observer Research Foundation, here.
These debates are incredible important from a policy perspective, and has vast implications for India’s national security, its global reputation, regional security in South Asia, and the broader global nuclear landscape.
Chief of Army Staff’s Statements on India-China Stand-off Raise Questions
Last week’s edition of Indialogue briefly discussed the ongoing stand-offs and clashes between Indian and Chinese forces along the disputed border between both countries. Below is a helpful map (from Shashank Joshi, Defense Editor at The Economist) showing the location of the clashes (as well as an ongoing border dispute between India and Nepal):
Reacting to news reports of the stand-offs, India’s Chief of Army Staff (COAS), Gen. Manoj Naravane, made comments to the media that grabbed the attention of national security analysts in India. First, he said that “aggressive behavior on both sides resulted in minor injuries to troops.” Second, he went on to say that “It is reiterated that both these incidents are neither co-related nor do they have any connection with other global or local activities.”
Here’s Dr. Harsh V. Pant, Head of the Strategic Studies Programme at the Observer Research Foundation and Professor at King’s College, London, outlining why those comments by the COAS are raising eyebrows:
First, they seem to give an impression that we are keen to absolve China of its aggressive policy along the LAC. By underling aggressive behaviour by both sides, the Army chief seems to be blaming his own soldiers for these tensions. Even if this is accurate, was this needed to be part of a public statement by the head of the Indian Army?
Second, why are we so keen to speak on behalf of the Chinese? When the Army chief suggests that these scuffles have nothing to do with other global activities, the question arises how would an Indian Army Chief purport to know the Chinese game plan? There is a global concern about aggressive military moves China has made in the last two months from the South China Sea to Taiwan and Japan. And Indian Army Chief seems to know with certain degree of conviction that India-China border tussle has nothing to do with this larger military posturing by the Chinese.
In Other News
India’s Chief of Defense Staff, Gen. Bipin Rawat, recently said that “Theatre commands (Land) will mainly be between the Army and the IAF. While it is the northern border there should also be a small Navy element,” and that the Navy’s fghter jets can be deployed the land borders since “There is not much of difference between sea flying and desert flying.” He also said that any future weapon system specifications outlined by India’s Services should be flexible, and have a “plus-minus” leeway. This is to ensure high quality performance, while also ensuring “a good product or equipment gets rejected due to the tight requirements which cannot be changed as per procedure once a tender is floated.”
India has joined 115 other countries in co-sponsoring a draft resolution led jointly by Australia and the European Union at the World Health Assembly to investigate how how the Sars-CoV-2 virus, which causes COVID-19, was transmitted from animals to humans. The draft resolution also calls for an impartial evaluation of the World Health Organization’s reponse during the COVID-19 pandemic. A full draft of the draft resolution can be found here.
The Government of India released its Foreign Trade data for the month of April 2020. India’s overall exports (including both merchandise and services) in April 2020 were estimated at $27.96 billion, contracting by 36.65% when compared to April 2019. Overall imports last month were estimated at $ 27.80 billion, contracting by 47.36% compared to the same period last year.
Mukesh Ambani’s Jio has secured three additional U.S. investors following the company’s multi-billion dollar deal with Facebook. In the past month, General Atlantic, a private equity group, announced it would invest $870 million in Jio, valuing the company at $65 billion. The announcement came after similar such investments in Jio, such as $1.5bn from Vista Equity Partners and $750m from Silver Lake.
Large-scale layoffs have begun to hit India, beginning with India’s online food delivery services. Zomato’s Founder and CEO announced that the company would lay-off nearly 13% of its workforce. Swiggy, another such service, announced it would lay-off 1100 employees across grades and functions.
Beginning on May 7th, the Government of India began the process to repatriate Indian citizens stranded abroad back home. As of May 13, “8503 Indians have been flown back to India in 43 inbound flights operated by Air India and Air India Express.”
President Trump has announced that he would donate 200 ventilators worth $2.9 million via USAID over the next two months. The President tweeted that “We stand with India and @narendramodi during this pandemic,” and that the two countries were collaborating on vaccine development.
Three to Read
From cogent analysis to potentially big news that you should keep an eye on, here are a few commentaries and other pieces of writing that I found particularly enlightening.
Dr. C. Raja Mohan, Director of the Institute of South Asian Studies at National University of Singapore, writes: “Significant political contestations within the US and between the US and China to reform, reorient or bypass the WTO system are at hand. All major economies will be drawn into this conflict. Hobbled as it was by shaky political coalitions and preoccupied by multiple domestic challenges, India in the mid-1990s struggled to cope with the profound changes in the global economic order. As the world trade system arrives at a contingent moment a quarter of a century later, India is hopefully better prepared.”
Richard Rossow, Wadhwani Chair in U.S.-India Policy Studies at the Center for Strategic and International Studies (and my old boss!), notes: “It is difficult to see positive opportunities during a crisis. But U.S.-India trade ties were headed in a very negative direction prior to the Covid-19 crisis. Protectionist sentiments on both sides were driving the narrative and policy changes despite the promise of a “trade deal” in recent months. But the pandemic has reminded us that our commercial relationship is deep and somewhat fragile to an emergency. Finding ways to shore up commercial ties so they can more easily sustain such a crisis can be a new, more positive workstream that will benefit companies and employees in both nations.”
Dr. Harsh V. Pant and Premesha Saha, both at the Observer Research Foundation, argue: “If the idea of the MEA is to share ideas and best practices among countries in the Indo-Pacific region to respond effectively to the complex challenges presented by the COVID-19 pandemic then supporting Taiwan’s admission in the upcoming WHA virtual meeting would be a welcome move. India’s foreign policy vision has evolved stance where issue-based alignments are becoming the norm. Its ties with Taiwan should also evolve accordingly.”
Thanks for reading this latest edition of Indialogue. Please let me know if you have any thoughts or feedback by emailing me at aman@amanthakker.com.