Chinese Whispers is a game in which players form a line and the first player comes up with a message and whispers it into the ear of the second person in the line. The fun lies in enjoying how the original message gets distorted by the time it reaches the last person in the chain. The analogy is quite useful in understanding how a call by the Prime Minister (PM) Modi for a demand-led growth eventually became supply side response in the Atmanirbhar Bharat.
The PM’s clarion call for Atmanirbhar Bharat lays down five pillars of self-reliance. These include – “[e]conomy, which brings in a quantum jump and not incremental change;
Infrastructure, which should become the identity of India; System, based on the 21st century technology driven arrangements; Vibrant Demography, which is our source of energy for a self-reliant India; and Demand, whereby the strength of our demand and supply chain should be utilized to full capacity.”
There was no ambiguity in the PM’s message; it was a vision of a demand-led package aimed at full utilisation of the existing capacity powered by local products and make them global. The point which remains a mystery is how such a clear message was distorted to point out that demand became supply and the very core of Atmanirbhar Bharat went missing over the next five days.
The distinction between demand and supply is always not apparent as both are functions of price. But supply is always a function of factor prices and quantity of factors employed (factors meaning land, labour and capital). Demand, on the other hand, is a function of income. An expansion in demand by way of income leads to expansion in supply by way of investments in capacity to meet the final demand of consumption.
The confusion between demand and supply is the not the only one in the financial package. The distinction between liquidity and solvency has been missed out as well. A short-term mismatch between inflows and outflows creates liquidity risk which can be addressed by lowering interest rates and increasing drawing power. This is what the Reserve Bank of India (RBI) has done. But a protracted period of liquidity risk transforms itself into a solvency risk and is sure to surface in a demand-deficient economy. Meaning, if enterprises don’t have money for a prolonged period, they will draw down upon their liquidity and will become insolvent over time.
The string of measures announced address the liquidity risk with scant regard to the impending solvency crisis. Solvency can only be addressed by restructuring liability. So, a reduction in the tax deducted at source (TDS) rate is addressing liquidity, not solvency, which will require a change in the overall tax liability. India’s own economic history since the 1980s is testimony to this kind of macroeconomics where domestic capacity additions funded by foreign currency loans, in the absence of demand, led to a balance of payment crisis in 1990.
Golden Opportunity Missed
At least there is no confusion on one point that there is a COVID-19 pandemic – a health emergency. From this view point also the allocation to health-related supply and infrastructure is just Rs4,000 crore under the head “Promotion of Herbal Cultivation”. If we add to this the Rs15,000 crore allocated for COVID-19 containment prior to the announcement, the overall allocation to heath sector in response to health emergency is just 0.904%.
The National Infrastructure Pipeline (NIP) Report which was made public just 10 days before the announcement noted on page 164 (Volume II that: “Compared with the population and the number of people requiring medical treatment, the available quantum of healthcare systems is sub-optimal. This has resulted in higher casualties due to preventable and curable diseases.
“There is an urgent need to upgrade existing government healthcare infrastructure by adding more beds, equipment, doctors and staff in government hospitals and primary healthcare clinics, especially in smaller towns and villages.”
Had the package made infrastructure push in the health sector as the basis for Atmanirbhar Bharat, the cascading impact would have been far more potent.
A simulation based on Leontief’s Input Output Analysis suggests that Rs100,000 crore stimuli to the health sector (Rs1.51 lakh crore allocated for the period FY20 – 25 planned under NIP) would have generated a total demand of Rs 1.6 lakh crore.
The capacity so created would have not just increased the service standards in Ayushman Bharat but help fight future disease outbreaks. Had the allocation to the sector been prudently decided, the pandemic was the right opportunity to create superior, accessible, primary, secondary and tertiary healthcare infrastructure facilities across India to meet the National Health Policy 2017 goals.
The multiplier effect would have been even higher if other projects mentioned in National Infrastructure Pipeline Report, which comes close to the PM’s call of an “Infrastructure, which should become the identity of India; System, based on the 21st century technology driven arrangements,” were given immediate priority.
All in all there is a wide gap between what was envisioned what was presented. To add to this, the mode of financing the package remains unclear. Of the Rs21 lakh crore, approximately Rs8 lakh crore or 38% is parked in the RBI reverse repo window. For this part of the stimulus to hit the economy, the velocity of circulation of money has to increase which needs a demand side stimulus and is critically dependent on the monetary policy transmission. So far, rate cuts have not translated into growth in credit.
Thus, despite positive measures, such a creation of a unified market in agricultural produce and increased allocation to MGNREG (Mahatma Gandhi National Rural Employment Guarantee Act), the long-term objectives and attendant priorities have no link to the original vision of Atmanirbhar Bharat.