In the immediate aftermath of a natural disaster, physical infrastructure, such as roads and bridges, are often destroyed and transport capacity is extremely limited or non-existent. As a result, access to affected areas becomes onerous or even remote. In this scenario, helicopters are the most suitable vehicle to reach the victims. Helicopters have certainly played an important role in extremely difficult rescue operations. However, we do have a similar version of these rescue operations in the world of finance after the outset of Covid-19. The citizens characterize this as free money (not sure if we have free lunches in this world, especially in the capital of Capitalism – United States of America) whereas savvy economists characterize this as ‘Stimulus’ (monetary and fiscal). Besides shielding themselves from the virus, the economists around the world are keeping busy in educating the world what it means – An immediate financial push (injecting liquidity) provided by the Reserve Bank and Central Government to uplift the economies from a deep, financial blow. History says that it certainly worked in the past (only in the near term but painful later) and is an integral part of any country’s economic wheel to make a proper, circular movement.
As we have seen in America in April-May 2020, the people received the ‘Stimulus’ money in their bank accounts directly in no time to a) Help themselves and survive the Covid-19 storm; b) Revive consumption to fasten the recovery process of the overall economy. The most impacted part of the society used this help as a blessing to save their family and use this support judiciously. Whereas, most of the receivers either shopped heavily on e-commerce or opened their Robinhood account. Wow! This kind of lavish spending by most of the consumers did artificially inflate the stock markets and consumption across different discretionary segments. The politicians and those in power will certainly take the credit for the revival of the stock market and the lead indicators of the economy as they measure the success of their party by the performance of the stock market and overall growth of the economy via these key lead indicators (Jobs data, etc.).
The Indianised version of the stimulus is very different from that of developed markets in all practical and economic sense. In India, the Covid-19 financial packages seemed like a beautifully designed gift by a bunch of accounting experts whose job was to balance the accounts, make some temporary tweaks in provisions for boosting immediate cash flows. Unlike the United States of America, the Indians did not receive any direct hard cash in their bank accounts. In America, the fiscal stimulus helped in stimulating the sales of a newer avatar of “Legalised Cocaine” in the form of e-commerce shopping and stock market trading (Robinhood). The citizens of the third world country unfortunately cannot afford this luxury where the majority is still struggling to meet basic amenities of life – Roti, Kapda, and Makaan.
Now, what’s the magnitude of this whole stimulus package? According to the IMF’s report, to date governments around the world have committed USD 12TN in fiscal stimulus and sooner the US can see another addition of USD 2TN. This totals to USD 14 TN of stimulus already with a future commitment of providing more if required (as if it’s an option that we can lavishly execute). The IMF also stated that the global economy will contract by 4.4% this year. On an ~USD 88 TN world economy, a 4.4% decline = a USD 3.9 TN (1.3x of India’s GDP) hole this year at a global scale.
What’s wrong with a fiscal package? People experienced free money only in Monopoly and not in reality, but the fiscal packages are real hard cash – fully baked in your bank account. There is no upfront brokerage, commission, or fee that you need to pay for it. Now, that’s where a simple problem becomes complex which is difficult for a common man to decipher.
The story starts with leverage. What does leverage do? It fast forwards the movie of your life by 5-10-15x depending upon how much you lever. Businesses use leverage to fast forward the product development/manufacturing cycle. All this with the belief that the product, once outstretched to a scale, will generate economic value. Retail consumers use leverage for their self-consumption i.e. no further generation of economic value over the useful life of that product/services. It certainly helps the retail consumers achieve their aspirational goals of life much faster.
Now, in the case of fiscal stimulus, the money is dropped as free food parcels dropping from a helicopter to a natural disaster-affected area. However, you will be celebrating to have this fiscal package come to you free of cost but in real terms, it is a loan given to you by the Fed/Central Government to be paid when you are no longer in trouble. The amount is injected in your bank accounts for disposal, the retail consumers spend that amount and help companies make profits, which in turn brings back lost jobs due to the pandemic. Sooner people will start earning and celebrating their monthly paycheques, and gradually, once the economy is out of the danger zone, the Fed/government will work on the repayment plan (of the so-called “Stimulus”) unless the natural economic recovery compensates for the same.
What can we do about it? Can we safeguard ourselves? Yes, certainly. The fiscal stimulus is good for recovery and a short-term booster to keep the engine of the economy alive. I am not saying that it’s not a smart option. It is certainly a must but as consumers, we should keep this backstage story in mind and deploy this stimulus judicially & smartly either as a rescue capital or for building economic avenues for future earnings potential. That’s where this leverage will work in your favor in times to come.
Do you still feel fiscal stimulus is free of cost? Think about it and plan accordingly for times to come.