The macroeconomic uncertainty we face now brought on by the COVID-19 Pandemic is unprecedented. This crisis is not just an economic one, but also a public health crisis. Consequently, it is important for economists and policymakers to consider the public health perspective along with other aspects of economic development while formulating a policy response. However, Dr.Lekha Charkaborty believes that this policy sequencing can be costly. While it is crucial to focus on public health and save lives, decisions such as lockdowns can cause severe economic disruption and have an enormous impact on vulnerable groups such as daily wage workers and migrant labour, leading to a humanitarian crisis wherein hunger could pose a larger problem than the virus itself.

In April, the Government of India announced a COVID relief package. This second monetary policy package intended to improve liquidity. Although there are several limitations to using monetary policy tools as a response, since the instrument used is mainly the interest rates and repo rates, this gives fiscal policymakers more opportunities to respond. Nevertheless, the monetary policy needs to be in accordance with the fiscal policy. In response to the current crisis, retrenchment of fiscal austerity measures is evident across the globe. However, the stimulus package announced in India appears to be more stringent compared to that of other countries. While the financial packages announced in other countries such as the United States, Japan, and Malaysia were around 10%, 20% and 16% of their GDP respectively, India’s package amounted to over 1% of the GDP. Dr.Chakraborty maintains that, if fiscal deficit is not too bad, it might be more advisable to go ahead with slight relaxations in the threshold ratio of 3% of GDP, and offer more flexibility to the sub-national and State governments. Rather than a one-size-fits-all approach at the national level, it is essential to decentralize and offer more autonomy and flexibility to sub-national and State governments, particularly concerning decisions like lockdowns. According to the Epidemic Diseases Act 1897, section 2, State governments can take special measures with regard to lockdown, quarantine and restrictions on mobility, and the Centre ought to regulate and restrict international travel and international ports of entry. In India, with a system that is working towards cooperative federalism, it is crucial to promote and ensure more policy coordination between the State governments and the Centre in their response, which is currently lacking.

In order to improve our fiscal space, it is necessary to go beyond the “deficit is bad” notion, and rather than focusing on the levels of fiscal deficit, thinking about the financing patterns of the fiscal deficit might be more beneficial. In times of crises such as these, money financing could be a suitable option for example, although it is imperative to bear in mind the potential macroeconomic effects and problems associated with any kind of deficit financing. Nonetheless, currently, seigniorage could be a viable option as models such as the Fiscal Seigniorage Laffer-curve model, can help predict the optimum level of fiscal or monetary seigniorage, and therefore help finance deficit without inflationary effects. This could be more effective than external financing including debt servicing and foreign aid from organisations like the International Monetary Fund (IMF). Focusing on the levels of deficit and putting forward stringent fiscal packages in response to such crises may not be successful in the long-run, and may not necessarily address the problems brought on by the humanitarian crisis at hand. Additionally, we could also consider playing around with the maturity structure of bonds and opt for long-term bonds.

Another concern Dr.Chakraborty pointed out was that of budget credibility. Called Fiscal marksmanship in economic terms, it essentially refers to the accuracy of the government’s fiscal forecasts such as revenues, expenditures, and deficits. A huge difference between what is projected/budgeted and the figures on what is actually spent indicates poor fiscal marksmanship. Over the past few years, many have questioned the government’s fiscal marksmanship and the budget transparency. While some countries have a fiscal council in place to ensure transparency and credibility, perhaps now is the time to consider institutionalising such a body in our country.

The ultimate goal of a fiscal policy response is generally limited to promoting economic growth. Dr.Chakraborty highlights the need to move away from a mere growth-oriented model and adopt a more holistic and human development-oriented approach, such as the model implemented in Kerala. It is imperative for our policy response to go beyond GDP and address aspects including health and nutrition, livelihoods, and the impact on small enterprises in the informal economy. For instance, a suitable response to tackle the loss of livelihoods for daily wage earners could be the provision of cash transfers and social security. It is necessary to take these aspects into account and think about economic recovery and macro-stabilisation before we can think about economic growth. Post COVID, measures such as universal basic income and participation income can be considered in order to protect livelihoods from future shocks.