The second tranche of the Centre’s enhanced financial package relies too heavily on credit mechanisms to offer farmers and the poor relief. Direct cash handouts would work better
In the situation India has found itself in, with commerce largely clamped and cash flows squeezed on account of corona curbs, we must get money moving quickly again, so that it forms incomes and then multiplies as it gains velocity from one transaction to the next. Only a national government has the wherewithal to achieve this, and the most effective way to see it happen is via the direct placing of purchasing power in people’s hands. The welfare aspect of it is obvious. Those deprived of their livelihood by the covid crisis need adequate compensation to tide over these times. It was no surprise that the focus of direct transfers in the Centre’s first relief package, unveiled on 26 March, was on the country’s poor. Under it, according to finance minister Nirmala Sitharaman, 200 million women Jan Dhan account holders were each being given ₹500 monthly for three months, 30 million poor senior citizens, widows and others ₹1,000 each, and 87 million farmers ₹2,000 each (earlier than planned) as part of the PM-Kisan transfer programme. There were food provisions as well, a worthy humanitarian gesture at a time of sudden hunger. Beyond these, however, the actual handouts had been too meagre for the distress in evidence. On Thursday, the Centre sought to boost support for farmers and the poverty-stricken as Sitharaman rolled out the second tranche of the enlarged relief package announced by Prime Minister Narendra Modi. Now, an estimated 80 million migrant workers in urban areas are to be awarded free supplies of foodgrain—rice, wheat and gram—over the next two months. Various other forms of relief were declared as well, though a substantial portion of Thursday’s sub-package relies on credit mechanisms to help people. While there were many revisions of old schemes and some new ones for our have-nots, and their beneficiaries would surely welcome these, almost all of these happen to involve intermediaries.
For stimulus purposes, direct money given out instantly, especially to those starved of cash, is observed to work best. The poor may spend less in total, but are known to display a higher “marginal propensity to consume" goods and services. Those who are hard-up are more likely to spend each extra rupee acquired than those who are better off and can afford to keep it aside for later use. Cash handouts for those at the bottom of the pyramid, thus, would get spent and translated right away into revenues for sellers of goods and services, who themselves would probably use up this income quickly. What exactly is bought or sold this way is irrelevant, so long as the buying and selling acts as a springboard for commercial activity. That is how aggregate demand swells.
It could turn out that restrictive conditions make low-value purchases difficult and slow. Yet, the fourth phase of India’s lockdown is expected to be lighter than what we have experienced so far. This offers an opportunity to pump prime the economy by pushing money around. Government projects that employ multitudes are one way to do this, and so the increase in enrolments and wages under our rural guarantee scheme is a good sign. An urban version of it could yet do plenty of good, supplementing the other financial facilities that have been aimed at them. What might arguably achieve the most at this stage of the crisis, however, would be a universal basic transfer of money to every Indian. The well-heeled can be asked to return this handout. But only a generous cash-for-all scheme can ensure that no needy individual is left
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