Are stimulus and relief packages fair and equal?

In the past year Sensex has recovered nicely from its pandemic lows and already crossed a record high of 60K. Nifty also seems to be heading towards a milestone 20K. In May 2020, the government announced a fiscal stimulus package of INR 20 trillion (~ 10 % of the GDP) to battle the pandemic. Surely, the rallying stock markets prove that we’re fine, right? To quote from the 2008 financial crisis documentary, Inside Job - "We're gonna keep growing. Okay? And, obviously, I'll say it: 'If you're growing, you're not in recession, right? I mean, we all know that.'" This was of course before the sub-prime crisis hit, and we all know how that ended.

The financial crisis of 2008 saw two major responses in the US – a $700 billion bailout ($442 bn was spent) from the government, followed by a series of quantitative easing, buying bonds in the open market to increase liquidity – both measures to get the economy back on track. The underlying rationale was clear – unless the government bails out corporates and the Fed engages in these measures, the economy will falter, and the country will face huge socio-economic costs. Protection of businesses deemed ‘too big to fail’ is presented to the masses as a foregone conclusion. The salaried class is asked to imagine what would happen if they lost their jobs, they are reminded that their dreams would evaporate in this depression. All of this is true, no doubt – all of this is “seen”.

What is not 'seen' immediately are the unintended consequences of these measures. Once the dust settled in 2009, corporates were bouncing back and seeing profits. While the corporate system was injected with excess liquidity, individuals who had lost their jobs and savings continued to struggle to find their footing. Ironically, it was austerity for many and socialism for the corporates despite the industry’s strong anti-socialism stance. “How dare the government subsidise education, healthcare & housing for the poor” – some capitalist probably while s/he receives a billion-dollar bailout for a crisis s/he caused because s/he wanted a fatter bonus cheque.

The totality of these actions has resulted in a large wealth transfer from the poor to the rich. Low rates have artificially boosted asset values, especially for riskier investments. They also allow for corporates to leverage at low interest rates. The wealthy, asset-rich, thus can take advantage of this by investing in the stock market and the private market while the asset-poor individuals get on by with their relatively stagnant wages. The risk-averse middle-class who invest in debt-linked instruments also stand to lose money in real terms with inflation higher than what the instrument earns.

India has had to do that as well: cutting rates and injecting money into the economy in hope that factories would be set-up and jobs created. A recent report published by Credit Suisse on global wealth indicates that total wealth grew by 7.4% while the world created fewer assets, in India – financial assets per adult gained 4% in 2020, while non-financial assets fell by 7%. Thus, this unequal flight towards financial assets has further deepened the wealth inequality in a country where 10% of the population hold over 70% of the total wealth.

Note – all of this was happening post 2008 and were consequences of actions taken much before the pandemic hit. Money given to corporates to bail them has been, in the past, used to pad the already cushy pay packages of C-suite executives ($1.6bn of bank bailout went to execs in 2008/9). Would this time be any different? In the US, the covid care package (CARE ACT) of $500 billion, came with measures – limits on stock buybacks & caps on executive compensation. Three months after the package was announced analysis showed money had disproportionately gone to the wealthy.

So, once the pandemic reached Indian shores and the government announced its stimulus package, I wondered if we would tread the same path we (and the US) had before. Unemployment rates in urban India hit 10%, the population of the poor doubled from 6 to 13.4 crores after the first wave. In contrast, India’s billionaires have seen their fortunes increase by 35% (~13 lakh crores). The policy measures taken to stimulate the economy have not only failed to have the desired effect but also worsened the wealth gap.

The natural question then is why the money should be transferred to the corporates instead of directly to individuals. The result would be the same, i.e. the money in the hands of the individuals will then be spent and become income for some-one thus else stimulating the economy. Cash transfers have already seen traction in countries like Mexico and Brazil where they have reduced poverty faster than the conventional “trickle-down” effects. The world bank has also recommended cash transfers in low-income countries.

The government already does this for the those at the bottom of the economic pyramid (but this is a fraction of the overall package). It is perhaps arguable that individual-focused distribution will be more complex than corporate-focused, but in my view this inefficiency would be a small price to pay considering that the expected “trickle-down” phenomenon has not come to pass in various similar situations. I’m certainly not arguing that ailing businesses should not be bailed out, but to be more cognizant of the disastrous effects such policies have had on an already deeply un-equal society.