It is clear that the economic costs of Covid-19 are going to be huge and widely spread. Assuming a gradual recovery in the second half of the year, the IMF estimates that Covid-19 pandemic will shrink world output by 3%. Government in rich countries have rolled out huge fiscal and monetary packages to mitigate the economic costs of the disease. This year the developed economies will run average deficit upward of 11% of their gross domestic products (GDP).
In India, a timely executed lockdown has helped in flattening of the curve, saving many lives. However, the measure is costly for the economy. Rating agencies Fitch and Moody’s have slashed growth forecasts for FY 21 to 0.8%, to 0.2%, respectively. Undoubtedly, Indian economy needs a raft of fiscal and monetary measures, in addition to the ones already announced.
Several commentators and business groups have demanded a large fiscal stimulus comparable to the ones rolled out by rich countries. The recommendations range from — Rs 10-15 lakh crore, that is, 5-7.5% of India’s GDP. A few experts have pitched for a separate Covid-19 budget. A separate budget, it is argued, will provide comfort the rating agencies by ring-fencing the expenditure. Reportedly, the government is considering a Covid budget. A separate budget is unnecessary.
The lockdown has turned the government finances upside down. The fall in tax revenue, especially the GST, is going to hurt badly. For instance, The centre has already lost more than Rs 28,000 crore in the auto sector that contributes 15% of its total GST collections. There is lot of uncertainty about the economic fallouts of the pandemic. In such a scenario it is almost impossible to arrive at meaningful estimates of the revenue and expenditures. The numbers in the current budget have been rendered meaningless, what to talk of a new COVID budget. However, spending on disease can be classified separately to nudge the government toward the fiscal discipline path as soon as the crisis is over.
A big size stimulus in one go is also not a good idea. Oversized packages in developed economies are aimed at reviving economic activities by protecting jobs and wages by incentivizing employers to retain workers and supplement social security benefits. Big stimulus packages make sense for those economies since the disease already has bottomed out and many economic activities have resumed. Except civil aviation, most other sectors have been opened, in some cases with reasonable restrictions.
However, the Indian situation is very different. We do not have payroll data for a large number of informal sector workers. Moreover, suppressing of economic activities, except those related to the essentials, is part of the Indian strategies to fight the virus.
Despite the green signal to resumption of economic activities from May 4 (except in the red zones), the problem is that the 170 red-zone district, where most economic activities will remain banned, cover most of big cities and metros that account for more than 60% GDP. Due to input inter-linkage with the red zones, activities in orange and green zones also cannot operate to full capacity. Consequently a large part of the economy will remain dormant in the immediate future. In fact, even after the pandemic is over and lockdown is lifted, the economy will take a long time to rebound.
The government’s efforts to contain the virus have saved many lives. However, the government needs to act fast and expand the set of permitted activities with appropriate fiscal support. There is need to improve admintrative and regulatory efficiency to smoothen flow of workers and inputs needed for production.
Beneficiaries of the first tranche of government support package included BPL households, Jan Dhan account-holding women and the Ujjwala beneficiaries along with widows and divyangs. While support to these groups and farmers shall continue, in the next round the government should focus on helping micro, small, and medium enterprises (MSMEs) and non-banking finance companies (NBFCs), based on simple rules.
They are crucial for reviving the unorganized sector, second largest employer after agriculture. The current account is a very good signal of the size and capital requirements of these establishments. Banks can be asked to double the limits of these accounts with interest rate subvention funded by the government, of course only for the duration of the crisis. The government should clear the large dues to MSMEs and other private vendors.
NBFCs, a lifeline for MSMEs, have stopped lending due to liquidity crisis facing the shadow banking lenders. The targeted long-term repo operations (TLTRO) round 2 funds provided by the RBI can be used by banks only for investment-grade bonds issued by NBFCs, and not for direct lending. While the bond route is not open to small NBFCs, a risk-gripped bond market has hampered fund-raising even by top-notch non-bank lenders. It will help if the TLTRO funds can be used for direct lending and relief of moratorium is extended to the NBFCs.
The next in line should be aviation, hospitality, automobiles, real estate, and logistics sectors. These sectors are among the worst hit by the lockdown but they and big industry can be helped in a meaningful way only when the economy reopens after the crisis.
Moreover, the centre will have to do the heavy-lifting as the state finances are in bad shape due to the steep fall in GST collections. The ban on sale of liquor during the lockdown and collapsed demand for petrol and diesel have made their fiscal position unsustainable. They should be allowed to borrow directly from the RBI or the Centre should do so on their behalf.
The Centre will have to spend large sums to save lives and livelihoods. The required sums can be raised by monetization of the deficit or borrowing locally as well as from NRIs. However, injecting a large sum in one go is neither feasible nor desirable.
The author is Professor, Delhi School of Economics.
