As India begins to assimilate the enormity of the COVID-19 pandemic damage, the disruption in the economic activity will continue for the next few months before normalcy may return. It’s an extraordinarily challenging time, and the most important goal was to flatten the curve. Countries that missed the bus have paid a hefty price.
I am proud of the disciplined approach that we are adopting in India. Almost all of India showed its character on March 22nd when they observed a voluntary lockdown drill. Now India, with a population of 1.3Bn, is under a complete lockdown for 3 weeks, and the initial response suggests the whole of India is supporting this unprecedented disruptive measure wholeheartedly. This gives me a sense that with responsible behavior over the next few months, India will be able to flatten the curve. The intention is well placed - to save lives first and then save the economy.
Understanding the Crisis:
The economic impact of Coronavirus is going to be devastating. A slide in the GDP was seen even before the Corona pandemic outbreak reached India. We are going to witness a further fall in the GDP in FY 20-21 as a result of this lockdown. Economic growth globally for this financial year is going to be zero or even negative and much worse in the coming two quarters. Let us look at some of the industry sectors.
The effect on the services sectors is going to be devastating. The sector employs almost one-third of the workforce and contributes more than half to the national GDP. The order books are down, and the supply chain has been disrupted.
The entertainment and events sectors have crashed. The travel, tourism and hospitality sector has been hit very severely. The airline industry is going to be hit massively, and the real concern is the workforce layoff.
The small informal businesses in the services sector would also need help.
In India’s entire business environment, the most critical area is the small and medium industries (MSMEs). In the informal sectors, MSMEs are going to face a dramatic decline in their economic activities and income. The MSMEs are where we need specific lines of relief. Working capital cycle, fresh credit lines, reschedule of repayments, etc.
Around 40% of India’s workforce depends on the agriculture sector, which contributes one fifth to the national GDP. Government agencies must ensure timely procurement payments with minimum support prices to ensure the livelihood of a large workforce in rural India.
One-fourth of the workforce depends on the industry sector, which contributes about one third to the national GDP. With an imminent lockdown, large scale job loss is likely. In the organized sector, especially the construction industry, housing, and commercial real estate activities are now at a standstill impacting direct employment.
LOSS OF EMPLOYMENT:
The most devastating impact will be on employment. A minimum of 10 crores in the workforce may be directly impacted by the decline in economic activity with the lockdown of cities and disruption in supply chain activities for the next few months. People are going to lose jobs massively in both rural as well as urban areas. After the recession ends, people will still be sitting at home jobless, or less pay. A substantial number of people are self-employed or are in small businesses that depend on daily cash flows. These people who rely on day-to-day cash flow will be suddenly bereft of cash for livelihood.
We are in the midst of an unprecedented crisis, and there is the only way forward, that is, to take this crisis head-on. The economic task force established by the central government is looking at the impact on the economy, and hopefully, we will have a plan in place to address the impact. Globally the governments are opening their purse; we are keenly waiting for India’s response.
I am surprised that the government and the Reserve Bank are still weighing their options. In contrast, several governments across the world have announced fiscal stimulus measures to help their respective economies stay afloat. We must have a big bang economic package immediately to give people confidence, and the speed is the essence. However, so far, there are only talks and no actions.
Prime Minister Modi has done enough on the nation-uniting front, and his government’s response so far been very proactive on containing the Covid-spread measures but very lackadaisical on the economic relief side.
What the government needs to or expected to do?
The RBI has so far been a bystander. Many central banks across the world have already cut their key lending rates and announced fiscal packages. Surprisingly, the Reserve bank has not moved with the same alacrity as the several other central banks have. The RBI is doing everything except announcing an interest rate cut to keep the financial system liquid enough. The reserve requirements are to be reduced, and rates need to be slashed aggressively.
I don’t get it what a task force can do in cutting the rates. An interest rate cut rate by 50-75 bps would add comfort to the businesses by reducing their interest payment burden.
The monetary and fiscal policies are far too tight for the situation at hand. Understandably, the banking system is already battling a pile of NPAs. Yet, this is time to offer relief to the businesses by permitting banks to restructure loan repayments by expanding the scope of the existing facilities.
Deferment of Loan Installments:
The most critical aspect of a business is the liquidity (cash flow) at a time when business revenues might fall to zero. With this lockdown, it will be further delayed. All banks must mobilize schemes to increase the working capital of MSMEs and others that face liquidity challenges.
RBI must work with banks and NBFCs for deferment of payment of all loans, including EMI on consumer loans and property-related EMIS for the next six months without any interest burden. The MSMEs, too, require deferment of their loan installments. The banks should also be advised to provide a better credit flow to help them tackle their cash flow and working capital requirement.
Deferring statutory and regulatory compliance requirements is okay, but not enough. To counter the shrinking cash flow, allow deferring payments with zero rates. Postpone taxes of sectors like tourism, hospitality, aviation, entertainment, and so on. Also, remove the GST of these sectors for 3-4 months. Waive off all EPS, ESI mandatory contributions for a period of 3 months. If a temporary GST holiday for the overall industry is not workable, at least allow delayed payment for three months with zero interest. Income Tax and GST refund already due must be processed immediately.
Direct Cash Transfer:
The first critical responsibility of the government is to take care of people who are at the margin and may lose their livelihood. For the migrant laborers, the contract laborers, standing at different railway stations of the country, and those who have lost their daily earnings or are going to lose, it is time to bring universal direct cash transfer. Without any such direct cash transfer, even a single day of country lockdown will make people cry. Linkup these people through the JAM trinity and incentivize them through DBT. Further, allow all Jan-Dhan-Accounts an overdraft limit of Rs.15,000, limiting it by Rs.5,000 withdrawal a month.
To cater to the cash-flow needs of the poorest, a temporary cash transfer of Rs.3000 per month per family (25Crore families) for 3 months would cost 2.25 lakhs, which is equivalent to 1% of the GDP.
The states can chip in to cater to an increased PDS supply and reach out to people who are the most vulnerable and help them with what they need to blunt the effect of the extreme hardships they are facing. However, many states have already started their own support measures.
How to achieve this recourse?
This is not the time to be financially prudent and over concern ourselves with the fiscal deficit. India has to forget the fiscal deficit for now. Any focus on ‘fiscal conservatism’ with the kind of stimulus required to deal with the economic cost of the Covid-Pandemic would be stupid. Our inflation and WPI are low. The overall debt to GDP ratios has fallen and is relatively flat with lower inflation. The forex reserve is also handsomely stable. Let the fiscal deficit go down to 6-7% from 3-4% for the FY20-21.
The state budgets also need to be relaxed. Their present fiscal deficit limit is at 3 %, and it can be relaxed to 4%, and the center can help them out.
Another good news at sight is the favorably low crude oil price. The lower crude prices help the Current Account Deficit that may also help to frontload the spending.
These extraordinary recourses may cost 3-3.5% of the overall GDP. It may seem huge but is within the ambit of what other countries are also preparing. India must not hesitate at this crucial juncture. It will send a clear signal that the government is committed to the livelihood and safety of its citizens.