There is an oft-repeated quote - "There is no free lunch" - intended to capture that everything has a price. Britain's Finance Minister Rishi Sunak seemingly dodged this dictum when he presented his summer statement last week. The economic package he presented included the offer of a 50% discount on lunches (and other meals) at restaurants, suggesting "There is no free lunch, but a 50% discount is possible". If only. The costs of running a deficit and increase in government borrowing will add up and will have to eventually be borne by the taxpayer. Still, given the unprecedented situation all economies are facing, a rise in the deficit is inevitable. There are two reasons for this - the increase in government expenditure that is warranted to prop up the demand side and the fall in tax revenue due to a drop in GDP.
Is the scale and composition of the economic response adequate and appropriate, given the challenges and the capacity of the economy?
Economists have almost unanimously endorsed doing what it takes to fight the economic crisis caused by the pandemic. The additional spending or foregone revenues of the UK's recovery package amounts to 6.2% of the 2019 UK GDP. This seems like a large number, but is in fact conservative compared to recovery packages in similar developed countries. According to an IMF report, the comparable figures for Germany, Japan and the United States were 9.4%, 11.3% and 12.3%.
The UK government bond yields are negative, and so its borrowing costs are anticipated to be almost zero. The debt-to-GDP ratio is over 80% and the pandemic is expected to increase it to over 94 to 113% of GDP. But this is exerting little pressure because borrowing costs are anticipated to remain low and the Bank of England has stepped in and absorbed the excess borrowing (which means the government has a ready buyer for its bonds which keeps its borrowing costs low relative to going to the market for a big sale). Importantly, the UK government had intended to move away from the austerity legacy of the previous Cameron government even before the pandemic and to increase public spending, primarily on projects in the north of the country where voters have recently moved away from historically backing the Labour party to voting for the ruling Conservative party. So the opportunity to spend way beyond what was possible in normal times has drawn only muted criticism from conservative policy-makers within the ruling party.
The economies of India and the UK are, of course, not directly comparable. However, given the universal nature of the Covid-19 shock, some comparisons can be instructive.
The size of India's economy is roughly similar in absolute terms, albeit with a population that is over twenty times larger. The same IMF report puts the additional spending or foregone revenues of India's recovery package at 1.2% of GDP. At first glance, the size of India's recovery package seems well in line with the different fiscal positions of the UK and India.
However, India's debt-to-GDP ratio looks much healthier than the UK's pre-pandemic position, and many expect that the recovery package would take it up to about 85%, still a fair bit lower than that of the UK. Of course, the borrowing options that the governments of the two countries face are quite different. India faces more pressure in government bond markets, with government bond yields jumping when the Finance Ministry announced plans to raise borrowing due to the pandemic. Still, compared to other developing countries, this is not a unique position. For example, recovery packages (again, focusing on additional spending or foregone revenue) in Brazil, China, and Indonesia were 6.5%, 4.1%, and 2.4% of GDP, which are much higher than that of India.
The main question though is not whether the size of India's recovery package is big, but whether the government has delivered a package that would ensure a timely and sound recovery.
In India, fiscal prudence very much dictates the thinking of the government and even the pandemic has not shaken it. This is unwarranted when those who are likely to be most worried about high debt levels of a country, like credit rating agencies and opposition parties, have labelled the government's response too small to aid a sound recovery.
Putting the size of the package aside, its composition is just as likely to be important in speeding up a recovery. And here, there is a big difference between the recovery package in the UK and India - in terms of who gets how much of the pie. Almost every country has adopted a mix of measures designed to boost consumption spending, prevent job losses and provide support and loans to businesses. Of the UK's £192 billion budget, £60.2 billion was for consumption spending like health infrastructure and universal credit schemes. Another £50.1 billion has been spent on business tax concessions like small grants to MSMEs and business rate holidays. A much larger amount, of £82 billion, is meant to fund jobs programmes like the Coronavirus Job Retention Scheme, which pays 80% of wages (up to £2,500 a month) for furloughed workers who are kept on by their employers, and the Self-Employed Income Support Scheme, which provides grants to self-employed individuals with profits up to £50,000 and affected adversely by the Coronavirus crisis.
India's recovery package looks starkly different from many developed and developing countries that have recognised this as a jobs crisis and devoted the bulk of their spending to supporting jobs. The government allocated INR 400 million in mid-May to the National Rural Employment Guarantee programme which provides 100 days of work to rural households that need work, and news reports indicate that the programme is already seeing a big increase in enrolment. Part of the spending on consumption and infrastructure is dedicated to agricultural work and is likely to support jobs and growth in the future. But the share of funding devoted to preventing job losses is miniscule. The Indian government is estimated to have spent over 4% of GDP to counter the economic decline from the Great Financial Crisis in the last decade. The budget allocation to promote job growth appears even more meagre as we stare at a crisis that is much more serious, one that directly threatens the jobs of ordinary citizens as opposed to the bottom lines of banks.
Estimates suggest 41% of people aged between 15-29 years were out of work in May 2020, up from 17.3% in 2018-19. But the government simply has not put many resources into job support programmes. In fact, this was an acute problem even before the pandemic: youth unemployment rates were estimated at 22.5% (compared to 12% in the UK). The labour force participation rate (LFPR) is 49% of the total population in India, compared to 63% in the UK, and could further decline due to the pandemic. Long-term unemployment can have debilitating effects on individuals and communities. The experience of countries like the United Kingdom which has oscillated through joblessness and austerity brings home the need for a new social contract to prioritise lives and livelihoods.
Supply-side policies, like loan guarantees, can help businesses tide over the pandemic phase. But ultimately, they need work to be productive and create jobs. That requires demand-creating measures to regenerate the economy. Both the UK and India have been timid compared to their peers. UK's per capita spending on demand-creating measures is £1,600. This lags behind that of its peers like Germany (£2500), Japan (£3300) and the United States (£3600). India looks almost negligent, spending just £14, compared to Indonesia (£44), China (£241) and Brazil (£275).
As the pandemic ravages the fortunes of the world economy, India is putting its people at a much bigger disadvantage by not giving them adequate means to recover. A country of young people, where a third of the workforce is under 24 years according to census estimates, can hardly afford to ignore the long-term economic and societal consequences of unemployment and the ills it could bring with it.
(Maitreesh Ghatak is Professor of Economics at the London School of Economics and an elected Fellow of the British Academy. Swati Dhingra is Associate Professor at the Department of Economics at the London School of Economics and a Research Associate at the Centre for Economic Performance.)
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