Fresh, tailor-made stimulus package needed to fight second Covid wave

The second wave of Covid-19 has stretched India’s health infrastructure. The economic impact as of now is far lower than what we saw in the first wave. In April 2020, the entire country was in complete lockdown.

  

Mobility data showed a two-third reduction in movement of people (excluding residence) from baseline level of February 2020. With people staying in their homes, India’s Q1FY21 GDP contracted by 24.4 per cent.

The restrictions went hand-in-hand with stimulus package, which covered reduction in interest rates, liquidity support, moratorium, and later, restructuring of loans by the Reserve Bank of India (RBI), cash payments to migrants and additional food subsidy allocation of Rs 3.07 trillion, increase in rural employment and production-linked incentive (PLI) scheme for manufacturing among others.

Globally, fiscal response to the pandemic has been two pronged. Cash payments to households as seen in the US and support to businesses and local governments to save jobs as seen in Europe. Monetary response has been accommodative across the world ranging from reduction in interest rates to quantitative easing and relaxation in repayment terms.

While India has shown remarkable progress in vaccination in absolute numbers (10 crore jabs in 85 days versus 89 days for the US), in percentage terms the US and UK are far ahead. Thus, the current wave will see a decoupling of economic growth depending on vaccination performance. In India’s case, H2 will look far better than H1.

In order to tide over the second wave, the stimulus has to be tailor made for people and businesses impacted the most. As of now, Maharashtra (14 per cent of India’s GDP) and Delhi (4 per cent) have imposed stringent restrictions on movement of people. Mobility data shows a 34 per cent reduction in workplace activity in Maharashtra from baseline. Compared with this, there is a 17 per cent reduction in Tamil Nadu and 19 per cent reduction in Gujarat. These three states account for nearly 45 per cent of employment in MSMEs and 41 per cent of overall MSME credit. 

Notably, during the first phase, Tamil Nadu government announced a special incentive package to promote MSME investments. Going forward, states can announce incentives for MSME investments to build supply chains under the Centre's PLI scheme. In addition to this, RBI window of restructuring for MSMEs can be extended. MSMEs benefited most from the Centre's sovereign credit guarantee scheme. A similar scheme can be announced by states to provide liquidity to MSMEs. 

The impact of restrictions will be felt on retail loans—banks as well as NBFCs and HFCs. As much as 25 per cent of personal loans in India have been disbursed in Maharashtra followed by Tamil Nadu (9 per cent) and Karnataka (9 per cent). While formal segment is relatively insulated because of work from home, the informal segment will see the maximum impact of current restrictions. A large number of informal loans are disbursed by NBFCs. Hence, an economic package tailor made for needs of vendors and small ticket personal loans can be implemented by state governments in conjunction with RBI and Centre.

State governments can lower the burden of fixed expenses on small units and stores by reducing property taxes and other duties. In addition, states such as Maharashtra had reduced stamp duty on real estate that led to revival of the real estate sector in the state. A similar scheme can be announced by states which will revive the real estate sector—one of the largest employers of informal jobs.

States had to rely on higher borrowings to meet their expenditure needs in FY21. They may have to rely on higher borrowing to mitigate the impact of the second wave as well. Recent announcement by the Centre of opening up vaccination to all adults above 18 years gives room to states to work with pharmaceutical companies to implement a speedy vaccination program. This will be the best antidote to revive demand and restore potential output.

Sameer Narang is the chief economist at Bank of Baroda. Views are his own.