How does India compare in the quantity and quality of its COVID-19 response to other developing countries?
- Before the announcement of the Atma Nirbhar Bharat package, India lagged significantly behind comparable developing countries that are similar in GDP per capita, state capacity, and structure of the labour force. As of early July, the gap seems to have narrowed.
Relief measures by India
- The extent of relief measures does not seem to be commensurate with the economic disruption and dislocation caused by the severity of the lockdown.
Lessons for India
On cash transfers
- Cash transfers constitute the largest category of support.
- The World Bank reports that, on average, cash transfers amount to 30% of monthly GDP per capita, reaching 46% for lower-middle-income countries, for an average of three months.
- Countries have also significantly expanded coverage of their cash transfer programmes from pre-COVID-19 levels
- For example, Bangladesh and Indonesia have increased the number of beneficiaries by 163% and 111%, respectively.
- India could take these actions into account in decisions about expanding existing transfer programmes or even creating new ones.
- Of the World Bank’s list of 621 measures across 173 countries only 2% related to public works, a clear indication of the popularity of cash transfers over public works for income support.
- Mexico, announced an enlargement of its rural permanent employment scheme to 200,000 farmers and beneficiaries.
- Indonesia has allocated more than $1 billion (more than ₹7,000 crore) to fund public works schemes that will benefit at least 600,000 workers.
- India has been a leader in employment guarantee policies with its flagship MGNREGA programme. This is the right time to expand entitlements in this programme as well as introduce an urban version of the programme.
Steps in the developing world
- Developing countries are resorting to drastic means to finance COVID-19 responses which includes
- The amendment of legal budget limits and the enhanced issuance of bonds — including a ‘pandemic bond’ by Indonesia.
- Central banks in many emerging economies are experimenting with purchases of public and private bonds in the secondary market (quantitative easing) or directly purchasing government bonds on the primary market (monetising the deficit).
- Indonesia and Brazil have both amended laws to allow their central banks to buy government bonds, which the Indonesian central bank is doing in the primary and secondary markets.
- Although the Reserve Bank of India has been buying sovereign bonds on the secondary market in India, the debate continues over whether the Indian government should invoke the “escape cause” in the Fiscal Responsibility and Budget Management (FRBM) Act, to enable the central bank to directly finance the deficit.
Why subdued fiscal response?
- In India, one reason for the subdued fiscal response and the resort to monetary measures is likely a concern with the debt-to-GDP ratio.
- Additional fiscal outlay in the form of cash and in-kind transfers and expanded public works schemes would save lives and jobs today and might prevent a protracted slowdown.