Economic Remedies for Covid

Pranab Kanti Basu

The Central government has tackled the economic crisis emanating from the pandemic most ineptly. There have been no dearth of populist schemes that the government has inaugurated almost on a weekly basis but there is little independent evaluation of these schemes, partly because they are too new. But many of these have existed almost entirely on paper and some have been unceremoniously discontinued without any formal announcement. The scheme for insurance cover of Rs 50 lakh for deceased covid warriors (Pradhan Mantri Garib Kalyan Package) announced with much fanfare by the GOI was discontinued in March of this year after only 287 claims had been disbursed.  So it does not make much sense to go into each of these schemes individually. Let us look, instead, at the macro aspects of GOI’s covid management economics.

All economists, worth their salt, have argued for Keynesian measures for tackling the economic fallout of the pandemic. The pandemic led to huge job loss on account of lockdown and other restrictions. This eroded purchasing power. Production decreased further causing more downsizing of labour force. Under the circumstances the only reasonable policy was to increase the purchasing power of the people. This is most easily done through fiscal expenditure channeled directly to the people through income transfer policies. It would lead to some amelioration of hardship caused by the economic crisis and it would also rejuvenate the economy by increasing demand. The GOI defied this basic argument. Its only concern seemed to be to fatten crony capital.

Table 1

Change in Income –Expenditure of GOI compared to same quarter previous year

HeadsApril-June 2019April-June 2020
Corporation tax-0.9%35.7%
Personal Income tax7.0%-12.3%
Excise duty-3.8%47.7%
Total expenditure12.8%4.7%
Revenue expenditure13%3.7%
Capital expenditure11.7%12.8%
Fiscal deficit12.7%33.1%
Source: Economic Survey 2020-21

The year-on-year rates of change for the April-June quarter for 2019 and 2020 will bear out this proposition. Table 1 shows that there was a substantial increase in growth rate of fiscal deficit in 2020 quarter , but a closer look at the data shows that this does not reflect any significant attempt by the government to increase the purchasing power of the people. Total expenditure increased by much less than half of the increase in the previous year. Also, revenue expenditure, which goes directly to increase the purchasing power, increased at a pace that was less than a third of the increase in the previous year. On the other hand the increase in capital expenditure, used to build assets, that will bear fruit in the future only, increased at a faster pace than in the previous year. If we look at the income side, the picture becomes clear. Most of the increase in deficit can be attributed to the decline in corporate tax (it declined by more than 35 times the decline in the previous year). While some fall is understandable, given the decline in sales, the huge decline is attributable to the government’s lack of will to raise money from the rich to fund social sector expenditure even in the time of the pandemic. This becomes abundantly clear if we look at the data regarding the accrual of wealth by the wealthiest in the country in this period.

According to an Oxfam report the wealth of Indian billionaires increased 35% during the first lockdown to make it a staggering Rs.3 lakh crore. The same report further claims that during the same period Mukesh Ambani established himself as the wealthiest Asian. If his wealth could be distributed among the 80 crore unorganised workers they could be kept above the poverty line for 5 months.

There was also a substantial decline in income taxes, which too does not signal any intent to ameliorate the distress of the poor, given that just a bit more than 1% of the population falls within the taxable bracket.  The deficit caused by the decline in taxes would have been greater, but for the phenomenal growth in excise duties – it increased to almost one and a half times what it was in the same quarter in the previous period. The increase in taxes on sales is accepted to have greater incidence on the poor than direct taxes that are levied on the wealthier segments. Behind the increase in excise taxes lurks another story which is generating public resentment – the skyrocketing petrol and diesel prices. As of June 16, the base (actual) price of petrol in Delhi cost Rs 37.29 per litre. The central government charges 34% as Excise Duty and the Delhi state government charges 23% totaling to 57% as the tax on the retail price of one litre of petrol. Minister of State, Anurag Singh Thakur, in a written reply to a question in the Lok Sabha, said taxes collected on petrol, diesel and natural gas as a percentage of total revenue have gone up from 5.4 per cent in 2014-15 to 12.2 per cent this fiscal. This is when both diesel and petrol consumption dropped during these eight months.

Table 2

Fiscal expenditure (above the line measures) borne by selected countries to combat economic effects of pandemic

CountryExpenditure as % of GDP
USA10.3
UK7.6
BRAZIL7.4
CHINA4.5
INDONESIA2.2
India1.6
Source: Economic Survey 2020-21

Table 2 compares our fiscal efforts to that of some selected countries. We can see that our fiscal effort to get out of the pandemic spawned economic crisis compares badly to developed countries, to other BRICS countries and also to other poor countries. 

The insensitivity of the government to the economic distress of the people can only be explained by the fact that popular support for the regime does not depend on its economic performance but on its politics of divisiveness.

*Pranab Kanti Basu is a Professor of Economics for over 40 yearsHe has been teachinin universities like Viswa Bharati and Calcutta University. He has taught Economics in Ashutosh College, Kolkata for a large part of his teaching life.

Kindly note that the point of views expressed in the article are entirely the author’s personal views. IPD takes no responsibility for the same.

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