Modi, the Prime Minister, and
Nirmala Sitharaman, the Finance Minister, face the most daunting challenge that
was ever faced by any of their predecessors since 1947. Economic recession is worst
ever faced including the “Great Depression” of 1930s. The challenges faced by
Modi and his team are extraordinarily unprecedented in mankind’s history.
As
per the IMF, “For the first time since the Great Depression both advanced
economies and emerging market and developing economies are in recession. This is a crisis like no other, and there is
substantial uncertainty about its impact on people’s lives and livelihoods.
Policymakers are providing unprecedented support to households, firms, and
financial markets, and, while this is crucial for a strong recovery, there is
considerable uncertainty about what the economic landscape will look like when
we emerge from this lockdown. ……….
Emerging market and developing economies face additional challenges with
unprecedented reversals in capital flows as global risk appetite wanes, and
currency pressures, while coping with weaker health systems, and more limited
fiscal space to provide support.”
Look
at the array of experts advice and
demands for stimulus to include: 1) eminent economic personalities advising
huge stimulus packages by drawing parallels with advanced countries; 2) Chief
Ministers particularly of Opposition
Party ruled States; 3) Organized Sector Honchos to include wide cross sections
from large corporate houses to medium business enterprises and small scale
industries; 4) big and medium real estate houses, 5) exporters; 6) hotel
industry from 5-Star to Restaurants; 7) I-Maxes and Cinema Halls besides
Bollywood and others; 8) media houses; 9) farmers; 10) informal workers; 11)
migrant labor; 12) students; 13) Advocates; and so on. Add to them, the burden
of evacuating stranded nationals/student on foreign shores and also migrant
labor and supply free food items for those lakhs of people housed in shelters.
Not
to be brushed aside is the aggregate amount of gross NPAs of Public Sector
Banks and Scheduled Commercial Banks (SCBs) were Rs. 8,06,412 crores and Rs.
9,49,279 crores respectively, that is, total of Rs.17,55,691 crores, as per RBI
provisional data on global operations, as on 31.3. 2019.
The
list of demands projected by the State Governments (Rs. 20 to 30 lakh crores) and the Industry (Rs 14 lakh crores to Rs 16 lakh
crores) alone amounts to Rs.34 to 46 lakh crores. Ashok Gehlot, the Chief
Minister of Rajasthan has alone demanded Rs. 1,00,000 crores for his
State.
The
first relief package is Rs.1.7 lakhs crores or about 0.8% of GDP. Confederation
of Indian Industry (CII) has suggested stimulus package equivalent to 3 per
cent of GDP which would add Rs 6 lakh crores to the available firepower.
Enhanced debt to GDP ratio can be a way out for adding fiscal space at a time
when the debt to GDP ratio is modest in India.
No
need for intellectual wisdom of exceptional order to highlight that to bounce
back from the pandemic quickly, India needs a “BIG” stimulus package.
But,
how BIG? Surely, it cannot be total stimulus package somewhere around to Rs.
100 to 120 lakh crores or 50% to 60% of GDP in one go with no accountability.
Noble
Prize laureate Abhijit Banerjee stated “We really haven’t decided on a large
enough stimulus packages. We are still talking about 1% of GDP. United States
has gone for 10% of GDP.” The problem of western based Indian economic experts
lies exactly therein. And, they compare India with either the USA (34 crores
population with nearly over 7 times GDP and many times over GDP PPP) or China
and suggest prescriptions that may not be relevant and appropriate to Indian demands
and availability. They fail to realize that the Government machinery led by
Modi is also contemplating over such a key issue and have formulating plans to
implement stimulus packages in stages.
For
example, Raghuram Rajan from the USA has stated “there’s little choice for the
government but to provide a bigger stimulus to revive demand. Many have argued
that while India’s lockdown has been the harshest, its stimulus package is one
of the smallest — so far. To fund a bigger public spending programme, the government has
either to print more money or issue new bonds to be subscribed by the banks.”
P. Chidambaram wants “Cut GST [Goods and Services Tax] rates by
50%.
To
provide a perspective, demands of industry honchos are recounted. Niranjan
Hiranandani, president, Associated Chambers of Commerce and Industry of India
(Assocham), highlighted that “The
economy needs a stimulus package of at least about Rs 14 lakh crores ,
including around Rs 2.20 lakh crores fertilizer dues, payments from public
sector companies, and tax and other refunds.” Hiranandani 5% GST cut for
6-months will cost (the government) Rs 3 lakh crores. DK Aggarwal, president of the PHD Chambers of
Commerce and Industry, demanded “an increased stimulus relief package of Rs 16
lakh crores.” Demand can also be created by paying another Rs 80,000 crores
through a direct cash transfer to farmers. “Pay them each about Rs 5,000
additional cash,” he said. Micro, small and medium enterprises (MSMEs) are on
the verge of closure due to liquidity crunch and other issues, he added. “They
need about Rs 2.80 lakh crores in terms of low cost credit and other
incentives.”
Even
the print media industry has suffered losses to the tune of Rs 4500 crores
during the months of March and April, the Indian Newspaper Society (INS) said
on Wednesday, and is seeking a relief and stimulus package for the sector that
employees three million people directly or indirectly.
Exporters,
particularly small units, are on the verge of closure, said Sharad Kumar Saraf,
president, the Federation of Indian Export Organizations (FIEO). They have no
money to pay wages this month, he added, disappointed at the extension of the
lockdown.
Furthermore,
the “Realtors” have started urging State governments to reduce stamp duty to 1%
for 4 months and seeking stimulus package to save jobs.
In
sum, Modi and Sitharaman duo assisted by their team of advisors face an uphill
challenge to overcome to satisfy all sections of society. Surely, the
government is aware of the downturn of economy and wants to revive it
expeditiously. How do you decide a right package and in what stages is not an
easy task. First, the exact requirement needs to be determined. Modi has already highlighted that they are
taking a “Calculative and Calibrated” approach to resolve the problem.
Be
that as it may, Gita Gopinath of the IMF has highlighted “TARGETED STIMULUS”,
which is most critical to ensure revival of economy and welfare of Aam Admi.
Whatever stimulus package is provided by the Central government particularly to
industrial houses, real estate houses etc must be linked to outputs – jobs
created and business turnovers.
Most
important is also the transfer of subsidies and welfare packages to
beneficiaries through the process of “Direct Benefit Transfer” which must be the
sole means adopted and implemented. It
implies that the State governments cannot demand stimulus allocations for
welfare activities sponsored by them. At
the same time, release food grains for the BPL families at nominal prices like
Rs.1 per kg of rice based on their “authorized cards”.
Kudos
to Abhijit Banerjee who has pitched “for direct cash transfer to 60% of the
population, issuing temporary ration cards and using ‘national’ Aadhar cards to
help the poor. He has welcomed moratorium on debt payment for the current
quarter but wants it to be permanently cancelled and not rescheduled. He felt
enhancing the purchasing power of people could actually help MSMEs more. “It is
more about reviving demand.”
Thus,
the Central and State government machinery must formulate a well defined format
or mechanism to monitor the expenditures incurred, jobs revived and business
turnovers, like as one expert has suggested to draw lessons of the TARP
mechanism used by the US during the 2008 crisis.
Otherwise,
sooner than later would emerge that the stimulus package funds have been
transferred to safe havens abroad by “Hawala Means” or used as “Corpus funds”
by political parties for the next round of elections.
Monitoring
mechanisms must be highly effective and stringent laws to violators of criteria
must be enacted and implemented.
Otherwise, revival of economy will remain a mirage in short term context
and the Welfare of Aam Admi would remain a forlorn hope.
None
can deny that the central government, and the Reserve Bank of India (RBI) are
doing everything to ensure factories to resume operations. They have announced
lifting lockdown restriction on industries located in rural areas. And, they have also eased restrictions on
real estate construction activity in urban areas and industries. So, the supply side activity is going to
resume sooner than later.
What
about the demand side? And, the demand may not pick up easily due to crunch in
“disposable savings” that may remain for quite some time.
There
is a breach of trust between the state and the migrant laborers which will come
out glaringly once the lockdown is lifted. Most of them are likely to rush back
to their families in villages, as if they are freed from jail. And, it will
take quite a long time for them to reconcile and come back to cities. So, the
farms and factories, especially MSMEs, in the relatively developed states of
western, southern, and north-western India are likely to face labor shortages
for many months, maybe years to come. This will lead to more mechanization of
farms and factories in these states. In Punjab, for example, most of the wheat
harvesting is already done by harvest combines, and now, even the planting of
paddy will be rapidly mechanized.
Let
me briefly review the state of finances of the States. It is common knowledge
that there are shortfalls of revenue collection due from GST compensation,
petroleum and diesel sale, stamps, registration and vehicle tax revenues,
liquor sale revenues. And, the shortfalls will continue also into the third
quarter of current financial year.
So,
the States demands include: relaxation in borrowing limit from open market and
the RBI; raise to 60% Wage and Means allowance interest free advance from Reserve Bank of India (RBI);
6-month interest-free moratorium on payment of loan installments and the
principal amount of loan taken by the state government, its boards,
corporations or companies (including Power Companies) from the Union Government
and its various institutions; compensation of GST until 2027 from existing until 2022; 50 per cent procurement of
agriculture crops on MSP instead of 25 per cent; scheme for payment of salaries
to workers by the MSMEs that are not in a position to pay the salaries and
wages to their laborers by bailing out employers; and, a national plan for the return of
migrants in a phased manner using special transport.
Let me reproduce
the extracts of article on “Kick starting or Rejigging Economy” : Speed is the
essential parameter; Direct Beneficiary transfers are good ways to provide
needy succor to the real beneficiaries.”; both the Central and State
governments must formulate a slew of policies and campaigns meant to push
people back to work, encourage business confidence and protect as many
companies from failing as possible; Prudent policy would be to delay payments
(tax filings, student debt payments, and small business loan payments);
austerity particularly extravaganza must be curbed; present fiscal policy
responses are primarily aimed at cushioning the blow to households, and firms by lowering interest rates and
deferred EMI payments etc., to promote liquidity in financial markets; and even,
private sector needs to be financially assisted to restart those firms that have
gone bankrupt to restart firms, rehire workers and reactivate supply chains in
order for the economy to rebound once social distancing restrictions are
lifted, particularly small- and mid-size firms through loans.
Of utmost
importance is to attract finances to the State’s exchequer by announcing one
time-Voluntary disclosure scheme through “Covid-19 Bond” schemes so that all
the large amounts kept in foreign banks and other safe havens inside the
country are deposited in banks. After all, it is common knowledge that 50% of
economy is due to black money. The War on “Economic Pandemic” has just begun.
To win the war, many more battles have to be fought on all fronts. There are no
magic wands available to win the war of economic depression or recession.
To
sum up, Modi-Sitharaman duo are under virtual seize from both ends: Covid-19
War; and the “Stimulus Package” warriors. Majority are aware that limited means
are only available to satisfy numerous claimants. Surely, the government
machinery is getting all the inputs on daily basis from all corners of the
country. Also, they recognize the expediency warranted to revive economy,
whilst at the same time look after the daily “food needs” of the BPL families
and look after the “safety net” of workers, marginalized individual
entrepreneurs and others at the lower
end of the spectrum.
Article by G B Reddy Sir
gundreddi5@gmail.com
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