Needed: A National Renewal Fund

Topics Economic slowdown | FRBM law | FRBM

The Indian economy is staring into an abyss. The scenes of thousands of people walking on foot for days back to their villages, the staggering loss of livelihoods and the potential bankruptcies of businesses, large and small, are just the most visible manifestations of a post-Covid economic crisis that is well underway. Therefore, this is little time for half measures or equivocation.

To understand what must be done, we need to look to history. Ninety years ago, during the Great Depression of the 1930s, American president Franklin D Roosevelt or FDR introduced the New Deal — a vast collection of public works projects, financial reforms and regulations. It was seen as instrumental in pulling America out of its worst ever economic crisis and led to dramatic economic and social changes in American society that persisted over decades.

That New Deal resonates in American history even today with talk of a Green New Deal in the era of climate change — but more to the point, it brought about a fundamental shift in behaviour in American politics. Because of what FDR did, American politicians, despite all the furious posturing during “normal” times over “big government” versus “small government” are a pragmatic lot during times of crisis  — witness the hundreds of billions of dollars of stimulus injected into ailing banks during the global financial meltdown in 2008, or even during the current pandemic, with the passing of a $2 trillion stimulus package by the US Senate —unanimously. Another historical analogy is the Marshall Plan to reconstruct Europe after the Second World War with American aid. Again, it was a seminal program whose effects lasted well beyond the four years (from 1948-52) that it operated; again, it happened because leaders were clear about what needed to be done to revive Europe after the Second World War.

It is this historical context which faces us today — not a standard recession or downturn (serious though such events are), but the Great Depression and a World War. Given this, the response in this country must be appropriate.

To enable the government to discharge the humongous obligations being placed on it, a stimulus package that would be of the order of 15 per cent of GDP (around Rs 30 trillion) suggests itself.

Illustration by Binay Sinha

This is similar to the size of the stimulus which helped pull China out of the 2008 financial crisis. Such a package could sit in a separate fund — call it a National Renewal Fund (NRF) and financed by long-term government borrowing (with a tenure of 50 years or more), from both the domestic and overseas markets. The NRF should have a moratorium on servicing interest for the first 10 years; and can follow a ballooning structure thereafter, for the next 40 years. Expenditures must be heavily front-loaded over the next few years to have maximum impact. The Fund could possibly be redeemed through a cess on direct and indirect taxes for the next 40 years.

Such a fund would deliberately not be under the purview of the fiscal responsibility and budget management or FRBM rules — the government and Parliament must understand, as many other countries already do, that this is not a time for fiscal discipline. Critics might argue that we must take a longer-term view but as the disastrous experience of Europe after the 2008 crisis shows  — when countries in Southern Europe fell into a vicious cycle of austerity, cuts in government spending, weak growth and falling tax revenue because of a dogmatic adherence to balanced budgets — there is a time for fiscal discipline. A crisis of this magnitude is not that time. Indeed, as history has shown, sticking to fiscal discipline in a time of serious recession can have disastrous economic consequences.

States will play a critical role in the way any such NRF is used and allocated — they are the ones at the frontlines of the battle against the coronavirus pandemic and it is they who, when the immediate impact of the crisis has ebbed, will be best placed to decide which sectors and projects need a big funding push. The NRF can also provide a guarantee mechanism for state borrowing — this is urgently needed since interest rates on state government bonds have been creeping up since the crisis began.

The NRF must not just be about providing relief — though that would be a critical component. It must also be seen as a way of revitalising critical sectors of the economy such as infrastructure and health and building institutions and projects whose impact will be felt for decades. Projects under the National Infrastructure Pipeline announced by the government toward the end of December last year, can be subsumed under the NRF and can be a good starting point for fund allocation.

Again, the New Deal is a model — infrastructure spending was at the front and centre of it. It was under the New Deal that now — iconic institutions like the Tennessee Valley Authority were set up. Other programmes under the New Deal funded projects like the building of roads, bridges, schools and hospitals in hundreds of communities across the United States.

The coronavirus pandemic is proving to be a hammer blow on an already weakened economy. Economic and social tensions are mounting. It is time to act.

It is time to move ahead with a National Renewal Fund, and moving out of within-the-box discussions around the Consolidated Fund of India and the Union Budget.
The author is chairman, Feedback Infra

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