Will various Economic Packages to fight COVID-19 help? Explained

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Context: The Union Finance Minister has announced Rs 1.70 lakh crore relief package under the newly framed Pradhan Mantri Garib Kalyan Yojana for the poor to help them fight the battle against CoronaVirus (COVID-19). The central government’s package comes a week after Kerala first announced a Rs 20,000-crore support for its people. Many states including Uttar Pradesh, Uttarakhand, Punjab, Telangana, and Rajasthan followed suit. Reserve Bank of India announced a series of measures to counter the economic slowdown caused due to COVID-19. 

Prelims: Current events of national and international importance.
Mains: GS III-

  • Indian Economy and issues relating to planning, mobilization of resources, growth, development, and employment. Inclusive growth and issues arising from it.
COVID-19 Economic Relief Package

Key Components

  • Insurance Scheme for Health Workers:
    • The Centre would provide Rs.50 lakh medical insurance cover for the next three months for about 22 lakh health workers in government hospitals fighting the spread of the virus at personal risk.
    • The health workers include ASHA (Accredited Social Health Activist) workers, medical sanitary workers in government hospitals, paramedics, nurses, and doctors.
  • (PM Gareeb Kalyan Ann Yojana):
    • Each person who is covered under the National Food Security Act would get an additional five kg wheat or rice for free, in addition to the 5 kg of subsidized foodgrain already provided through the Public Distribution System (PDS).
    • One kg of pulse a household would also be provided for free, according to regional preferences. This is expected to benefit about 80 crore people.
  • Cash Transfers and Other Benefits over Next Three Months:
    • About 3 crore poor pensioners above 60 years, widows and disabled people would be given ₹1000 in two installments.
    • The 20 crore women holding Jan Dhan Yojana accounts would get ₹500 a month.
    • The 8.3 crore poor households, which received cooking gas connections under the Ujjwala scheme, would get free gas cylinders.
  • For Workers:
    • Wages are being hiked under the Mahatma Gandhi National Rural Employment Guarantee Act scheme, from ₹182 to ₹202 a day.
    • The Centre is directing the States to use the ₹31,000 crores held by Building and Other Construction Workers Welfare Boards to provide support to the 3.5 crore registered workers.
    • The States can also use the money available under District Mineral Funds for medical screening, testing, and treatment.
  • For Land-owning Farmers:
    • The first installment of ₹2000 due to them under the PM-KISAN income support scheme will be paid promptly in April, the first month of the financial year.
  • For Companies & SHGs:
    • For small companies with 100 employees or less, of whom 90% earn less than ₹15,000 a month, the Centre will bear the cost of both employer and employee contribution (a total of 24%) to the Employees Provident Fund (EPF) for the next three months. This will benefit 80 lakh employees, and incentivize 4 lakh establishments.
    • Collateral free loans provided for women self-help groups under the National Rural Livelihood Mission are being doubled to ₹20 lakh, potentially benefiting seven crore households.

Immediate Impact of the Announcement on the Market

  • Sentiments in the market improved leading to gains in BSE Sensex and NSE Nifty. Earlier, Sensex and Nifty have crashed badly during the pandemic.
  • The rupee appreciated 57 paise to 75.37 against the US Dollar in intraday trade.
  • The rupee has weakened against the US Dollar during the pandemic.
  • The other news that is positive for India’s fiscal health is the fall in crude oil prices.
Analysis of the Package
  • Positive Points
    • It covers various sections of the vulnerable, ranging from farmers to healthcare workers.
    • It is appreciable on the part of the government that it has made the use of existing schemes like PM Kisan in the package.
    • The efforts appear to keep the funding within the budget as much as possible and retain control over the deficit.
    • Application of PM Gareeb Kalyan Yojana will help in the disposal of excess stocks with the Food Corporation of India (FCI).
    • The Food Corporation of India (FCI) and the National Agricultural Cooperative Marketing Federation of India are now holding some 77.6 mt of cereals (3.5 times more than required) and 2.2 mt of pulses respectively.
    • The offer to pay both employer and employee contributions to the Provident Fund for very small business enterprises will offer relief to those businesses that have been forced to shut down operations.
  • Negative Points
    • The effectiveness of PM Gareeb Kalyan will be more in states with well-functioning PDS. That is, Kerala, Tamil Nadu, Chhattisgarh, and Odisha — but not Uttar Pradesh or Bihar.
    • When daily wage earners are supposed to remain at their homes (lockdown), the only way to compensate them under MNREGA is through unemployment allowance.
    • Farmers are facing both lower crop prices due to a coronavirus-induced market collapse, and higher harvesting costs on account of labor shortages from the lockdown, no new benefit has been announced for them in the package.
    • Another challenge for the government will be to locate and deliver support to the migrant workers, many of whom are trekking hundreds of kilometers to their homes or lining up at shelters for a meal.
    • Corporate sector and middle-class people not being beneficiaries.

Is there a specific strategy used by the government in this relief package?
  • Government has followed a two-pronged approach:
    • Supply Cycle:
      • Ensuring a steady supply of food and cooking gas to poor people
      • Easing cash woes of the vulnerable sections of society
    • Fiscally prudent:
      • By utilizing existing schemes funding for the package is kept within the budget so as to retain control over the deficit 
    • Preserving Financial resources:
      • Given the uncertainty over the length of crisis – the government may announce future relief packages to adapt to changing situations.
RBI Step to Fight Pandemic
  • Context:
    • It Cuts repo rate to 4.4%; CRR to 3%; 3-month moratorium allowed on all loans.
    • On March 27, 2020, the Reserve Bank of India announced a series of measures to counter the economic slowdown caused due to COVID-19. The Central bank advanced its Monetary Policy Committee meeting due to the COVID-19 pandemic. This was the 7th Bi-Monthly Monetary Policy Statement of the RBI for the financial year 2019-20.
    • The RBI measures introduced are to inject Rs 3.74 lakh crore into the Indian Economy according to the RBI Governor.
  • Highlights:
    • While India has locked down its economic activity, the main objective of RBI is to keep finance flowing.
    • The repo rate was cut by 75 basis points (bps) to 4.4%, the reverse repo rate was cut by 90 bps to 4%. RBI rules banks and other institutions to provide a three-month moratorium on all loans.
  • Other Key Decisions
    • The Cash Reserve Ratio was cut by 100 bps to 3% of NTDL (Net Time and Demand Liabilities).
    • The Cash Reserve Ratio is the minimum fraction of the customer deposit that a bank can hold.
    • The investments are to be classified as Held To Maturity. RBI is to introduce the Net Stable Funding Ratio between April and October 2020. It is the ratio between the amount of stable funding available to the amount of stable funding required.

  • Cash Flow:
    • Monetization of massive deficits starts can lead to high inflation. 
    • Modest cash transfer might not be enough given the drying up of incomes for the vulnerable sections of society
  • Implementation issues:
    • People may face difficulties to draw money from their accounts during the lockdown
    • Migrant laborers may find difficulties to access the extra food grain announced
    • Package does not address the challenges being faced by Informal MSMEs and other hard-hit sectors.
Way ahead
  • Globally, many countries had announced stimulus packages involving 10-12% fiscal expansions. In comparison, this package is only about 0.75% of India’s GDP, which is marginal.
  • The Government should now turn its focus towards businesses that are running out of cash and may soon default on even salaries and statutory commitments if relief is not given.
  • Part II of the economic relief package should not be delayed beyond the next couple of days.
  • Intervention by RBI like providing regulatory forbearance, the moratorium on interest payments, changing classification norms, and ensuring easy access to credit. 
  • Centre needs to enhance the resources of the State through measures like
  • Releasing all the pending dues owed to the state governments on account of GST compensation. 
  • Assist states in raising finances from markets (by giving sovereign guarantees)
  • Sharing bonanza from fall in Crude Oil Prices
  • Consult States to ensure that supply chain, spread across multiple states, of essential commodities is not disrupted
  • Harvest time may lead to price fall or wastage due to disruption caused by lockdown, States to be financially supported (agriculture is a State subject).
  • Civil Society and Corporates need to pitch in during this crisis with their financial and human resources.
  • The fiscal deficit is bound to go up substantially. The higher borrowing programme will need the support of the RBI if the interest rate is to be kept low.
  • The monetization of the deficit is inevitable.
  • The strong injection of liquidity will store up problems for the next year. Inflation can flare-up.
  • The government needs to be mindful of this. All the same, the government must not stint and go out in a massive way to combat the virus. This is the government’s first priority.

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