Narendra Modi's Rs 20 lakh crore stimulus blends shrewd geo-economics with Swadeshi-coated booster, but it may not be a panacea for jobs growth
While global investors with their view from a London or New York may look at India as a long-term alternative to China, the Modi government's own close relations with Japan may provide leverage.
'Looking at London, talking to Tokyo,' is an expression used sometimes to describe a squint in the eye or a cross-eyed view. But this could almost literally be an appropriate metaphor for Prime Minister Narendra Modi's Rs 20-lakh-crore stimulus announced to revive India's economy hit by the COVID-19 pandemic.
Behind Modi's obvious push for India's self-reliance through an "Atma Nirbhar Bharat' call, there is not the conventional inward-looking approach that was the hallmark of Mahatma Gandhi's Swadeshi approach that advocated a "Be Indian, Buy Indian" philosophy; nor is there a Nehruvian wish to come out of colonial-era clutches by building a domestic industrial base.
While what we see outwardly is a cocktail of the two in terms of political messaging to build on national pride, the deeper subtext is of a post-globalisation, post- Coronavirus universe in which India is trying to reduce imports from China while becoming an alternative manufacturing base in a worldwide supply chain web. A key takeaway from Modi's speech is: "India does not advocate self-centred arrangements when it comes to self-reliance."
There are many questions still unanswered as the details of the prime minister's package are yet to be fleshed out. Finance Minister Nirmala Sitharaman's planned announcements will be keenly watched.
But it is clear that to truly get the import of Modi's strategy, we have to look beyond his loyal cheerleaders who see grand statesmanship in everything he does or says, and his bitter critics who quickly find flaws or superficiality in what he says.
We have to look at both the content and the context of Modi's 33-minute speech to get some clarity. They are such that he is trying to package the inevitable as an initiative while spotting the opportunity in the virus threat that might potentially alter the world economic order. We could call it the rise of 'geo-economics' as a logical corollary of geopolitics in which Japan and the West may look for an alternative growth base to Corona-stung China. India is clearly the leading large-scale candidate to fill the gap.
But there is many a slip between the cup and the lip. Questions remain on key aspects of the stimulus, which include land and labour issues going beyond the simple arithmetic formula of spending to boost growth.
First, we need to know what is the short-term help needed on a large-scale to aid hundreds of millions of migrant and informal sector workers coping with a lack of jobs/incomes on the one hand and a public health emergency on the other. As this is being written, crowded railway stations and migrants walking the highways pose a clear and present danger of a community spread of the COVID-19 pandemic.
Secondly, we need to see how much of the stimulus package constitutes real spending involving taxpayer money. It is clear that what India lacks now is demand and a tax squeeze at this juncture looks neither desirable nor feasible. If global credit rating agencies see a financial crisis arising from overspending, it may put foreign direct investment (FDI) on difficult ground. However, industrial output shrank 16.7 percent year-on-year in March, when the lockdown was initiated. Modi has rightly erred on the side of industrial revival rather than inflation management because retail inflation at four-month lows provides the right ballast for spending more. Lower global oil prices also provide elbow room for spending.
It is not clear if the Reserve Bank of India's moves to aid liquidity forms part of the planned stimulus. We may reasonably assume that credit guarantees to help small businesses may handsomely add to the stimulus number that looks like 10 percent of the GDP but in effect will be less of a fiscal threat to the government. The speech is aimed at talking up an economy frozen on its tracks, which is a smart thing to do because things have come to a point where the threat from hunger, joblessness and social chaos seem to loom larger than that invisible virus from Wuhan.
That still leaves us with the big question: where is the extra dose of money going to come from? A smart guess would be: overseas. While global investors with their view from a London or New York may look at India as a long-term alternative to China, the Modi government's own close relations with Japan may provide leverage. Japan has announced a $1.1 trillion stimulus to face the COVID-19 challenge, estimated at 21 percent of Japan's GDP. Part of that money can find its way into India because India has both a manufacturing base and a demography plus demand equation that provides a market for a developed country in search of a market. Modi clearly spoke of the demography and demand factors in his speech. Remember, India's Foreign Minister Subrahmanyam Jaishankar is an old Japan hand.
We also have to look at the slew labour law liberalisation measures in BJP-ruled states over the past few days, especially in Uttar Pradesh, as an incentive for Japanese investors because infrastructure and labour issues have been critical for the Samurai corporations.
Investment, however, is only part of the future story. Migrant workers going back to their villages, and their nursing psychological wounds caused by an unimagined virus threat, will be factored in bringing them back to their shop floors -- or not. If controversial labour laws hinder rather than help their mood, things could be difficult. Last but not least, even if overseas manufacturers increase their base in India, they will take a while to set up shop -- and when they do, given the growth of robotics and automation across industries, we do not know how much of that will translate into jobs for teeming millions.
However, if the stimulus is used to clean up India's banking system by measures such as a widely speculated "bad bank" to absorb the hangover of the non-performing assets (NPAs) problem, public sector banks may revive or ease up lending to micro, small and medium enterprises (MSMEs). That might help more than FDI shots in creating jobs.
We need to also see the timeline over which the government will spend its money and the way industries respond. The COVID-19 threat is a health scare. Some of the behavioural changes it has ushered in and/or will usher in are unknown factors in a complex economic chessboard. One is tempted to draw a parallel with Modi's 2016 gambit on demonetisation of high-value currency notes that did not quite work. With an estimated 27 to 30 million youths having lost their jobs in lockdown-whacked April (that is more than the population of all of Australia), the big threat to any fiscal booster is not inflation but unemployment -- for which there is no panacea.
Modi's speech is thus a long-term strategic push and a short-term mood builder. Between the mood and the promise falls the long shadow of real-life economics.
Just as hydroxychloroquine is more of a tentative treatment for the COVID-19 virus than a certain cure, Modi's booster may well be more of a necessary, but not a sufficient gambit to lift India's sagging economy.
The writer is a senior journalist and commentator. He tweets as @madversity
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