Selective opening not enough

Govt's silence on economic package is surprising

After extending the nationwide lockdown till May 3, the Union government on Wednesday issued detailed guidelines on activities that will be allowed from April 20 and the ones that will remain prohibited to contain the spread of Covid-19. The government is opening up rural India to a large extent, including procurement of agricultural products, and manufacturing and distributing fertilisers and pesticides. To further support the rural economy, work under the Mahatma Gandhi National Rural Employment Gurantee Act will be allowed, along with other activities such as construction. For the rest of the economy, manufacturing will be allowed in select areas with restrictions. Transportation of goods will not be restricted and e-commerce companies would be able to resume operations. The government will also allow firms in the information technology-enabled services sector to operate with up to 50 per cent workforce. 

Though logistics would be a big issue for firms as public transport will remain suspended, the government has made a good beginning. Even a partial resumption of economic activity will help ease some pressure on the supply of goods and bring part of the workforce back to work, especially in rural areas. However, most businesses in the urban areas will remain shut at least till May 3, and would need some kind of government support. The extension of the lockdown will have a disproportionate impact on the economy and the cost will rise rapidly. While the lockdown is necessary to contain the spread of Covid-19, it is not yet clear how the government intends to contain the overall economic damage. So far, the Reserve Bank of India has given a moratorium on debt servicing and has infused liquidity into the system, but this will clearly not be enough, and several businesses, especially in the micro, small and medium enterprises space, will need direct government support to survive.

A large number of business failures will not only choke the financial system and result in mass unemployment but also make recovery more difficult. Even large businesses, particularly in sectors such as airlines and hotels with practically zero revenue, would need support to survive. These businesses will also take a long time to recover. While the prime minister urged businesses to not fire employees, it will increasingly become difficult for companies to sustain the workforce without revenues. Businesses in India are now justifiably getting anxious as the government is still dithering over spelling out its plans on how it will support the economy. Beyond a token Rs 1.7 trillion package, the government has shied from announcing any economic package, without which industry, both large and small, will not be able to sustain operations. 

To be sure, the government has serious fiscal constraints and its finances were under severe pressure even before the Covid crisis struck. But it still has no option but to support the system. The Central government has also not adequately addressed the financing challenges of state governments, which are at the frontline of fighting the pandemic. There is no doubt that the general government deficit will expand materially this year, as is happening all over the world. But not intervening at this stage to support businesses is not an option any more. The government must break its silence on a substantial economic package soon.