• As the novel coronavirus spreads, a double crisis looms over India: a health crisis and an economic crisis, as the nation goes for an all-out shutdown.
  • Recently the Prime Minister of India declared that India will get an economic task force in his first nationwide address since the coronavirus pandemic hit India.

Background: The coronavirus pandemic is bound to slow down economic activity and growth in the days and months ahead as factories and services are shutting down around the world. The world is experiencing an additional slowdown along with the trade wars, meltdowns etc.

Need for such lockdown: When one decides to stay at home, there are two possible motives for it: 

  • a self-protection motive and 
  • a public-purpose motive. 

The economic impact  of lockdown on India can be traced through four channels: 

  1. external demand; 
  2. domestic demand; 
  3. supply disruptions, and 
  4. financial market disturbances.
  • External, domestic demand: As the economies of the developed countries slow down their demand for imports of goods will go down and this will affect our exports. In fact after six months of negative growth, it was only in January that Indian exports showed positive growth. 
    • The fall in oil prices will impact remittances:  India’s oil import bill will come down substantially. But this will adversely affect the oil exporting countries from which Indian labour’s remittances may slow down.
    • Transport routes lockdown: As passengers travel less, the transportation industry, road, rail and air, is cutting down schedules, sometimes drastically. This will affect in turn several other sectors closely related to them.
      • The airline industry: aircraft have been grounded and airlines are doing little overseas business. This has impacted the incomes of taxi drivers and taxi businesses
    • Mass lay off: There are already reports that a third of all restaurants could shut down in the formal sector alone and shed more than 20 lakh jobs, in the coming months. 
      • Not paying contract staff and freezing new hirings: Many businesses have contract staff, who won’t be paid in this situation. 
      • Informal businesses of different kinds - from street vendors and those employing daily wage labourers to small shops - are also suffering.
  • Supply disruptions: It is estimated that nearly 60% of our imports are in the category of ‘intermediate goods’. Imports from countries which are affected by the virus can be a source of concern. 
    • Domestic supply chain can also be affected as the inter-State movement of goods has also slowed down.
    • Impact on the automotive sector: The entire automotive sector is shutting down its factories. No factory produces everything itself, it has suppliers. Once production at a big factory shuts down, the impact is felt down the value chain.
  • Financial market issues: The stock market indices are at a three-year low. 
    • Foreign Portfolio Investors are withdrawing their money from the Indian markets. 
      • In this process, the value of the rupee in terms of the dollar has also fallen. 
    • The stock market decline has a wealth effect and will have an impact on the behaviour of particularly high wealth holders.
    • Bond yields are rising as investors are buying the government bonds heavily. This will have a crowding-out effect on the borrowings of the private sector. 
  • The overall picture
  • Spending less: 
    • People who are fired will spend less money than they were doing before. 
    • Even those holding on to their jobs will spend less just to be on the safe side. 
    • Also, with people staying at home and trying to isolate themselves, there will be a natural tendency to spend less on discretionary items. 
  • Lower private consumption: As people, in general, buy less, shops stock less, which in turn affects production. 
    • All this will lower overall private consumption and, thus, slow down economies around the world.
  • Growth forecasts for India have been cut: Bank of America projects India will grow at 4.7% in 2019-20 as against 4.8?rlier. The government’s growth forecast is 5%. 
  • Need for an economic package for India: Under such painful conditions, India needs a comprehensive recovery package that will first cushion the shock and then help the economy recover.
  • Challenges in creating an economic package
    • Fiscal deficit: The fiscal deficit of the Central government will turn out to be higher than that indicated in the budgets for 2019-20 and 2020-21. 
      • Revenues are likely to go down further because of the virus-related slowdown in economic activity.
    • Monetary policy concerns: 
  • The policy rate has already been brought down by 135 basis points over the last several months. Beyond a point, a reduction in interest rates does not work. Credit may be available. But there may not be takers. 
  • Any substantial reduction of policy rate can also affect savers

Way ahead: The two major tools that are available are monetary policy and fiscal actions. They should be executed for making a combination package of a basic income of ₹3,000 a month, a right to work and food grains, to provide a secure safety net.

  • The package should rest on four pillars: 
    • providing a safety net for the affected; 
    • addressing disruptions in the real economy; 
    • unclogging the impending liquidity squeeze in the financial system, and 
    • incentivising the external sector of trade and commerce. So here is a broad plan for a ‘COVID-19 Economic Recovery Package for India’.
  • Fiscal actions: The government should ignore fiscal deficit concerns and go out in a massive way to combat the virus. This is the government’s first priority.
  • Improving the testing setup with a budget of ₹1.5- lakh crore: the COVID-19 testing, treatment, medical equipment and supplies capacity can be expanded through the private sector and be reimbursed directly for patient care. 
    • This will need testing and treating at least 20 crore Indians through the private sector which will help create a large number of jobs in the private health-care sector, with trickle-down benefits.
  • Compensating job loss :  a direct cash transfer of ₹3,000 a month, for six months, costing nearly ₹2.2-lakh crore and covering agricultural labourers, farmers, daily wage earners, informal sector workers and others is needed. 
  • The Pradhan Mantri Kisan Samman Nidhi (PM KISAN) programme with a budget of ₹75,000 crore can be subsumed into this programme.
  • Tapping social schemes: The first step is to make good use of existing social-security schemes to support poor people - pensions, the Public Distribution System (PDS), midday meals, and the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), among others.
    • Initial measures could include 
  • advance payment of pensions, 
  • enhanced PDS rations, 
  • immediate payment of MGNREGA wage arrears, and 
  • expanded distribution of take-home rations at schools and anganwadis. 
  • Integrating MGNREGA with the Pradhan Mantri Gram Sadak Yojana & the roads and bridges programme: The Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) must be expanded and retooled into a public works programme, to build much-needed hospitals, clinics, rural roads and other infrastructure. 
    • These three programmes together have a budget of nearly ₹1.5 lakh crore. This must be doubled to ₹3 lakh crore.
  • Distribution through Public Distribution System: The Food Corporation of India has enough excess stock to provide 10kg rice and wheat to every Indian family, free of cost, through the Public Distribution System.
  • Display creativity: Keeping public services going in this situation is likely to require some initiative and creativity.
  • For instance, anganwadis could play a vital role in public-health outreach at this time, even if children have to be kept away. 
  • Many public spaces could also be used, with due safeguards, to disseminate information or to impart good habits such as distancing and washing hands.
  • Helping States: There can be some sharing of expenditure of the recovery package of ₹1-2 lakh crore by the States which incur an expenditure of ₹40 lakh crore
    • But after Goods and Services Tax (GST),  they are largely dependent on the Centre for their tax revenues through direct taxes and GST.
    • Some States have already taken useful steps of this sort, but this requires big money from the Central government.
  • Monetary policy measures
    • Steps for the central bank: The Reserve Bank of India (RBI) announced a ₹1.5-lakh crore liquidity and credit backstop facility recently. Further, the RBI should set up a credit guarantee fund for distressed borrowers for credit rollover and deferred loan obligation.
  • The policy rate can be further reduced.
  • A two-year tax holiday and an appropriate incentive scheme must be designed for exports and service sectors that have been devastated (airlines, tourism, hospitality, entertainment, logistics, textiles, leather). This could cost the exchequer between ₹1-lakh crore and ₹2-lakh crore.
  • Repayments to banks can be delayed and the authorities must be willing to relax the rules. 
  • Temporary relaxation of rules regarding the recognition of non-performing assets.
  • Deficit financing: Monetisation of deficit is inevitable. Inflation can flare-up. The government needs to be mindful of this. 
  • Finding the money: The ₹5-lakh crore to ₹6-lakh crore recovery package can be funded largely thorough three sources — reallocation of some of the budgeted capital expenditure, expenditure rationalisation, and the oil bonanza.
  • Rationalizing ₹4-lakh crore capital expenditure for FY2021: For example, there is a budget of ₹40,000 crore for the revival of the telecom public sector units which can be delayed and the amount reallocated.
  • Rationalizing ministerial demand of grants: Fifty-four ministries in the Union government of India made a demand for grants and a total of ₹30-lakh crore has been budgeted as total expenditure for FY 2021.There is ample scope to rationalise expenditure in these 41 ministries to extract ₹2-lakh crore for the recovery package.
  • Using fall in global crude oil prices: It can help save nearly ₹2-lakh crore which can be used to fund the recovery package or make up for shortfall of tax revenues.

In summary, India needs an immediate relief package of ₹5-lakh crore to ₹6-lakh crore targeted across all sections of society and sectors of the economy. This is India’s moment for the equivalent of the “New Deal” that U.S. President Franklin Roosevelt launched in America after the Great Depression of 1929.

Economic Initiatives by foreign nations

  • The United Kingdom unveiled the U.K.’s biggest economic recovery package in its history, as an antidote to the crisis; there is no fixed cost to it. 
  • The United States is finalising a trillion-dollar economic recovery package, while Germany is going ahead with ‘unlimited government financing’ for the disruptions due to the outbreak. 
  • France, Spain, Italy and the Netherlands have all launched a half-a-trillion dollars combined in recovery measures.

Image Source: Financial Express