The 21 day lockdown announced by the Prime Minister due to outbreak of COVID 19 is the biggest draconian measure taken by any government so far, far exceeding demonetization. Its impact is not merely confined to possible economic recession and low growth, but would have immense social and psychological upheaval of all sections of the society. Understandably, the unorganised sector consisting of agricultural labourers, small and marginal farmers, petty traders would be most affected. They constitute roughly 90% of India’s employment and contribute 45% of the GDP. This was the sector which was most affected after demonetization leading to a drop of around 1.5% of GDP and loss of employment for 2.1 million as per the CMIE estimate. The fiscal package announced by the FM has been a very potent anodyne to mitigate the hardship of migrant labours, small and marginal farmer, the elderly and the health workers. In particular, transfer of Rs 6000/- to small farmers would benefit close to 8.69 crore farmers. The increase of wage from Rs 182/- to Rs 202/day will benefit around 5 crore labourers under the MNREGA program. The additional benefit of 5kg rice/ wheat and 1 kg pulses to people below poverty line will benefit close to 270 million people. It has also an extremely empathetic package for women (83 million) who will receive free gas cylinders under the Ujjala scheme for three months. The most innovative move has been medical insurance coverage of Rs 50 lakhs for health workers who have been the real warriors along with the police personnel to fight this unprecedented human disaster.
While the package of 1.7 lakh crore is much less than the 5 lakh crore package suggested by the previous FM, Mr Chidambaram, there is a remarkable congruence the way the present government’s initiative are directed towards inclusive justice for the most vulnerable . There is criticism that the government hasn’t provided a package for the MSME sector and the aviation and hospitality sector who were the shining stars of India’s high growth story. The uncharitable view has been that the present fiscal package is like a band aid to a bleeding economy. However, as the above initiatives would show that such a criticism is largely unfounded.
The RBI has acted in tandem with government’s fiscal policy by reducing the repo rate by 75 basis points and CRR 100 basis points. It has also allowed a moratorium on EMI payments for the next three months. The other significant move that the RBI has taken is to reduce the reverse repo rate significantly to 4% in order to discourage banks to park their surplus funds with the RBI. Prof Geoffrey Crowther had presciently observed, “You can lead the horse to water but you cannot make it drink, unless it is thirsty.” He was referring to economic recession when there would be few takers, even if the repo rates are very low. Though the RBI Governor, has reduced the repo rate by 175 points in the last year (from 6.25% to 4.4% now) there has been hardly any significant increase in the credit offtakes from the banks. This is largely due to niggardly transmission by the banks and humungous non-performing assets (9 lakh crores, largely in the public sector banks).Howsoever well intentioned the move by the RBI to revive investment in the Indian economy, the harsh reality is that ‘monetary policy has efficient brakes but poor accelerator to bolster growth.’
The present pandemic like the financial contagion in the 1930s in the US , has affected the US economy in no small measure. After the bitter experience of China, the north south divide in terms of development, seems to have thawed. Italy has gone through a huge devastation in terms of death toll closely followed by United States now. It is therefore, refreshing to find that President Donald Trump has announced a fiscal stimulus package of 2 trillion dollars, particularly for workers and small businesses. This includes direct transfer of $1200 to every American earning less $75000. The Federal Reserve Bank has also reduced the repo rate to an all-time low of 0.13%. President Trump has observed, “Workers and small business need money now in order to survive. Virus was not their fault.” Quite clearly, India is following the footsteps of the US in terms of combining fiscal stimulus with easy money policy, though the quantum of stimulus is much less.
There is an apprehension that the present
fiscal stimulus will further accentuate India’s fiscal deficit.
Barclay’s has pegged the economic cost of 21 day
lockdown at 9 lakh crores, which is about 4% of India’s GDP. The Moody’s have
predicted that India’s growth is likely to be as low as 2.5% next FY. Such
dismal economic forebodings do not take into account the fact that mitigating human tragedy is far more important than the cold calculus of economic growth
numbers. When India got partitioned, around 15 million
people travelled from India to Pakistan and from Pakistan to India. The death
toll was estimated at around 2 million. In the pandemic of 1918, around 70
million people died globally and 5% from India. The death toll during partition was largely manmade.
The present crisis
has defied technology, innovation and best of human minds, except how to contain its spread. The government must be complimented for taking timely
pre-emptive measures to
pre-empt large scale death of the most vulnerable sections of society.
However, the long term implications for the finance minister could be humongous. The easy way out would be to borrow from the public through government bonds or raise money from the RBI through treasury bills. It can also raid the coffers of the RBI. However, the more sensible option would be how to increase its tax collection, both in terms of direct taxes and GST which stands at only 11% of our GDP. It may be recalled that late Shri Arun Jaitley in his budget speech of 2016- 2017 had mentioned that about 1.48 lakh people had deposited an unaccounted for money of around 5.48 lakh crores during demonetization. He had also suggested that such deposits would attract 60% tax which will fetch the government additional tax revenue of 3.3 lakh crores. This would need to be followed up as they are genuine tax evasion. Besides, the public sector banks, LIC and the railways are ideal candidates for privatization. The present government has the requisite political muscle and clear political will at its helm. R. Roden had observed, ‘A bit by bit increase will not impact the process of growth in developing economies. They need big push.’ While India needs a big push, the remarkable story of India in this hour of crisis has been cooperative federalism which was earlier a rhetoric. Politically adversarial states like Odisha, Kerala and Delhi are taking the lead to stem the crisis in tandem with the central government. The Indian Constitution puts health, hygiene and hospitals as the remit of the state government. The remarkable synergy between the centre and the states is a fitting saga to underscore the fact that humanism trumps GDP numbers.
Very perceptive take.