Unconventional, Thrifty Methods to Revive the Financial system

Debates on economic boosters get stuck on whether government should spend more. But GoI’s fiscal situation is improving and it can do plenty with moderate extra spending. Here’s how.

What is the key insight of a revival strategy?

It has to be consumption-led. 2021-22 data shows real per capita private final consumption expenditure (PFCE) fell more sharply than GDP did. Clearly, household consumption has taken sharp hits, and continues to do so. The other key point is since the pandemic, and with health risks continuing, health insurance is critical. Health expenditure is a major consumption downer.

But won’t higher consumption stoke inflation?

No. That happened after the revival package following the 2008 crisis. However, there is a clear difference between then and now. In 2009, pay commission awards, loan waiver, large MSP increase and past arrear payments adding up to 22% of incremental PFCE resulted in a frothy boom in consumption.

None of that applies now. In 2020-21, incremental PFCE has declined by Rs 7.4 lakh crore, while household debt increased by Rs 7.5 lakh crore. Hence any income support for households will nurture consumption, and not be inflationary.

Yes, inflation is going up. But that’s mainly due to high indirect taxes, not because of consumption.

What about fiscal deficit?

To begin with, the fiscal situation isn’t as bad as is generally thought. GoI can get an additional Rs 1.32 lakh crore over the amount budgeted for oil excise tax collections. And for GST, the extra amount is likely to be Rs 60,000 crore. And, more important, there are a number of unconventional, fiscally moderate ways to support consumption.

Devise a micro livelihood loan for MGNREGS job-cardholders.

There are 9.35 crore MGNREGS cardholders. For 100 days’ work at Rs 200/day, the cost is around Rs 1.87 lakh crore. This payment can be frontloaded. Commercial banks can advance, say, 30% of income, or Rs 50,000 crore, to MGNREGS cardholders, all of whom have bank accounts. Government can “reimburse” banks’ interest costs on these advances. At 8% of Rs 50,000 crore, this will come to Rs 4,000 crore.

The debt will be self-liquidated when the cardholder contributes labour. The key thing is the economy will get a spending power of Rs 50,000 crore. Assuming a marginal propensity to consume (MPC) of 0.7 this should result in a consumption boost of Rs 1.66 trillion. This will be purely subsistence based and hence non-inflationary.

(MPC is the proportion of extra income an individual spends on consumption. MPC of 1 means entire extra income is spent.)

Give livelihood loans for the rural poor.

Government can offer loans up to, say, Rs 50,000. This loan may be given on the premise that interest-servicing alone will keep the loan current. But loan renewal will be linked to a successful repayment record. If government were to bear, say, 3% interest subsidy, on a portfolio of Rs 50,000 crore, the outlay would be only Rs 750 crore for half of 2021-22. And these loans will also act as a big consumption booster at subsistent levels.

The additional advantage of these micro livelihood loans is that they will help the banking system prepare a comprehensive database and credit history of marginal borrowers.

To improve health insurance cover, use savings account interest.

Create an opt-in scheme to deduct interest from savings accounts to pay towards mediclaim policies. The approximate size of the health insurance coverage is Rs 58,572 crore. Savings bank interest across all accounts is Rs 1.6 lakh crore. The difference between these figures shows the potential of this idea.

There are 130 crore savings bank accounts. Average interest paid per account is Rs 1,215. An opt-in scheme, where the account holder’s savings bank interest can become the premium of a health insurance policy, means that at an average premium of around Rs 1,200, health cover of up to Rs 50,000 can be bought.

This scheme can be temporary, for the duration of the pandemic. Most people pay no attention to their savings bank interest. This is an excellent way to leverage that amount for something useful.



Views expressed above are the author’s own.


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