Economy needs more govt support

Lockdown was a brave decision. Now, policy-making requires a similar display of boldness

The government deserves full marks for reacting quickly to the Covid-19 outbreak and imposing a comprehensive 21-day lockdown. India had very few cases when the lockdown was announced but the government, seeing the writing on the wall and the spread in Italy, was determined to be proactive in tackling the pandemic. 

Independent assessments carried out by Oxford University and others have all ranked India as having the most comprehensive and total lockdown of any major economy. It was a decisive and brave move by the government to shut down the economy. The fact that we have about 8,500 cases and not in the lakhs is nothing short of a minor miracle, and largely attributed to the government’s actions.

While the government has been decisive on the public health front, it has been dithering on the economic response needed to fight the pandemic. No matter when the lockdown is officially lifted, it will be months before we get back to near normalcy for the economy. Most commentators expect the Indian economy to deliver somewhere between 2 and (-) 2 per cent gross domestic product (GDP) growth in fiscal 2020-21, with Q1 of the financial year having a decline in GDP of somewhere between (-) 10 to (-) 15 per cent. These are horrific numbers, by far the worst I have ever seen. Corporate profitability will be wiped out.

Illustration: Ajay Mohanty

 

Globally, too, both the European Union and the US will have GDP growth of between (-)5 to (-)9 per cent for this year, with unemployment in the US expected to hit 20 per cent. Already in just three weeks, almost 17 million people have lost their jobs in the US. 

These are exceptional times, and across the world countries are stepping up to try and cushion the economic shock, throwing fiscal discipline to the winds. 

The US has announced a fiscal stimulus package of over $2.2 trillion (10 per cent of GDP), and is actively discussing additional stimulus. The US is expected to have a fiscal deficit in excess of 19 per cent of GDP in calendar year 2020. Singapore has dipped into its reserves for only the second time in its history, and delivered a fiscal stimulus that is over 12 per cent of GDP. Even the Germans are willing to borrow and spend to support their economy, in addition to multiple EU-wide programmes. All these steps are in addition to the measures taken by central banks to cut rates, flood the financial system with liquidity and support asset markets like corporate bonds and commercial paper.

 India has been far too conservative when it comes to the steps to deal with the hit to our economy and livelihoods caused by the pandemic. The Reserve Bank of India (RBI) has been active on the monetary policy front, cutting rates, boosting liquidity and allowing a three-month moratorium on most loans. These are good first steps but more needs to be done. 

The fiscal policy response has been a real disappointment. We have announced one set of measures, after a delay, valued at 0.8 per cent of GDP in incremental spending. This package, though small, was rightly targeted at the bottom of the pyramid, but  nothing has been announced for salaried workers and medium, small and micro enterprises (MSMEs) even as we approach the end of the 21-day lockdown. The government has to be bolder. We cannot be incremental in policy approach.

 Despite the fiscal constraints, a fiscal package of 4-5 per cent of GDP is necessary. It will not be inflationary as this is consumption support, to replace lost income and consumption, not a conventional fiscal stimulus, which is incremental. Besides, the global lockdown is a massive deflationary demand shock. As long as we can manage the agricultural harvest, we should not worry about inflation. No company, with sales down 50-60 per cent, has the pricing power today.
 

Investors will give a pass to the government for any such programme as long as it is time-bound, for specific consumption support and tracked transparently. After all, every major economy in the world is on this path today. India has announced the least fiscal support of any major economy. Nobody will penalise us in trying to save the economy.

 The RBI will be required to support the borrowing programme of the government to enable this level of spending, which again is happening across most central banks globally. We can go back to more conventional fiscal settings once we are past this economic shock. 

The money should be used to increase direct cash transfers via the PM Jan Dhan Yojana accounts and PM-KISAN programmes, as well as the outlay for the Mahatma Gandhi National Rural Employment Guarantee Act. We have to use these programmes to deliver money not just to farmers but also into the hands of the approximately 150 million informal workers. For the approximately 50 million contract and permanent employees who are on a corporate payroll, the government should offer to bear a part of the wages (subject to an individual salary cap) for any company that is below a certain balance sheet size or in a distressed sector, such as hotels and retail. This will ensure we do not have mass unemployment.

We also need to enable the flow of credit to the MSME and SME sectors. The only way to do this is through banks and non-banking financial companies (NBFCs). However, most banks may be wary of taking the credit risk as they have just come through a horrendous corporate credit cycle. The government or RBI will have to backstop the credit, and take the credit risk decision away from the lender. Some type of credit guarantee or credit enhancement will have to be provided by the sovereign. Without credit, many of the SMEs and MSMEs will simply perish. These companies have gone through a series of challenges owing to demonetisation, the goods and services tax and the collapse of NBFCs, and the lockdown may be the final nail in the coffin, if not supported. They employ the majority of our workforce and we cannot abandon them. The economic consequences and human cost of mass failures in the MSME and SME space will be catastrophic. An alternative would be to suspend asset classification norms for the next 12 -18 months for all loans to MSMEs and SMEs. This will ensure they are not classified as non-performing assets and hence reduce the risk in lending to these companies. 

These programmes can be fine-tuned as one goes along to minimise misuse but they need to be operationalised immediately, as there is panic among these companies. India is largely an informal economy. We have low GDP per capita and limited social safety nets. Thus, we are extremely vulnerable to a shock when the economy halts and human-to-human interactions and services stop. 

The RBI has more to do as well. However, the bottom line remains that much more fiscal support is needed and our actions cannot be so tilted toward monetary policy. We have been bold and decisive in tackling the public health side of the problem. The same boldness must now be seen in economic policy-making.

The writer is with Amansa Capital