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Saving Lives and Livelihoods Amidst a Once-in-a-Century Crisis 33

a demand shock both through disruptions in the labour market, which affect household
income, and through the precautionary motive to save, which stemmed from the uncertainty
amidst the health crisis. In a normal economic crisis, policy support is rendered to stimulate
aggregate demand as quickly as possible. However, the containment measures required to
limit the spread of the pandemic, which constrained economic activity, reduced the efficacy
of demand-side measures during the lockdown.

1.48 The unprecedented nature of the COVID-19 shock, the associated uncertainty about the
length and severity of the pandemic, and the widespread prevalence of lockdowns which restrict
in-person shopping made it ex-ante unclear how individuals would use direct cash transfers.
An analysis of stimulus payments in US documented that only 15 per cent of recipients of
this transfer spent their transfer payment, while 33 per cent saved it and 52 per cent used it to
pay down debt (Coibion et al., 2020). Most of the spending was on essential items like food
and other non-durable consumer products. This was largely due to the restrictions placed
by the pandemic-induced lockdown with curtailed options for discretionary spending. The
uncertainty of the duration of the pandemic with associated job loss or reduced incomes
induced precautionary savings in the anticipation that these funds will be needed to make it
through a long period of low income or for health urgencies. Carroll, et.al, 2020 showed that
in the face of a prolonged and severe crises, government may want to consider a broad range
of policies targeting aggregate demand, with direct transfers being only a part of the fiscal
policy response.
1.49 Indian policymakers, backed by evidence, recognized that the lockdown would
adversely impact economic activity and disrupt livelihoods. The fiscal policy response of
the Government of India to the pandemic was, accordingly, strategized with a step-by-step
approach. During the first two quarters of FY:2020-21, the Government ensured that funds for
essential activities were available despite a sharp contraction in revenue receipts. The initial
approach was to provide a cushion for the poor and section of society and to the business
sector (especially the MSMEs) to tide over the distress caused by disruption of economic
activity. The Pradhan Mantri Garib Kalyan Yojana (PMGKY) for ensuring food security
through public distribution system, direct benefit transfers to widows, pensioners and women,
additional funds for MGNREGS, and debt moratoria and liquidity support for businesses
(Table 3). With the easing of movement and health-related restrictions in the third quarter,
the the government transited in a calibrated fashion to support investment and consumption
demand through Atmanirbhar 2.0 and 3.0. The timing of stimulus was tuned to the absorptive
capacity of the economy, which was affected by the lockdown. There was no point in pushing
the accelerator while the foot was firmly on the brake as a demand stimulus at a time when
supply was constrained would have not helped. The timing of the expenditure push, especially
the capital expenditure, after the reduction in health-related curbs, manifests the strategy of
stimulating ‘growth’ when it would be most effective (Figure 29). As we have seen above, the
economic recovery gained momentum since the first quarter.