Designing a Fiscal Package for Reviving the Indian Economy from COVID Effect

COVID-19 has disrupted not only the healthcare systems of the world, but also the economies of both the developed and developing nations. A proper recovery from the COVID-19 can be expected only after the wide-spread availability of a vaccine, until then, the battle with the pandemic & its effect on the economy is expected to continue for a long timeframe.

Economies, typically, are expected to recover from a downturn in any of the 3 following ways, depending on the severity and the duration of the crisis: 1) V Shaped – rapid recovery 2) U shaped – a long drawn recovery 3) L shaped – a new normal.

While many analysts are pointing towards either U or L shaped curves for India, there is a need for immediate steps to restore the health of the economy and align it to the growth trajectory (similar to a V shaped recovery) – to protect the welfare of the large sections of the population in the unorganized sectors. The task force should also include representatives from all ministries and evaluate the outcomes against the set expectations for every quarter of FY20-21, from Q2 to Q4.

The stimulus package from the Govt. should address the following 3 broad measures:

  • Enhancing and ensuring the healthcare system preparedness
  • Economic Relief to the affected industries and workers
  • Economic Stimulus to set the wheels of growth in motion

The pandemic effect of COVID-19 on the economy:

India has taken a tough choice of opting for a lockdown in an effort to flatten the pandemic curve, while protecting the healthcare systems from congestion effect and allowing time for enhancing healthcare capacity. In a lockdown, India is estimated to have lost around Rs 32,000 crore on a daily basis [1] – to be around Rs 8-11 lakh crore for the full lockdown period of 26 days (since April 20 it was a diluted lockdown with a few services being reopened). Hence, the situation warrants a large fiscal stimulus package to address the economic loss and revoke the economy from the downturn, while keeping the rise in the fiscal deficit to as minimal as possible.

COVID-19 brought in a unique scenario in which both supply-side and demand-side economies and both local and global value chains are affected. With very little movement happening, except for healthcare and essential services, many industries are facing a huge impact on the supply side. Sectors like aviation, auto, hotel & restaurants, real estate, tourism, etc. have virtually come to a stand-still and in the brink of collapsing if the effect sustains for longer durations.

With more than 90% of the workforce in India under unorganized sector [2], without any kind of social security and minimum wages, the lockdown and social distancing measures lead to a potential loss of livelihood for large sections of the society. The lockdown also expected to lead to changes in the consumer behavioural patterns, as people will tend to focus more on wellness and financial savings as against travel or discretionary spending, in the short to medium term basis – leading to further downturn and lesser demand in certain industrial sectors like tourism, auto, hospitality, etc. The twin demand reduction effect, reduction in the domestic consumption and the near-term discontinuity in the global demand, will have a potential for large jobs losses in the system.

Figure 2: Classification & Analysis of Affected Industries

Options for funding a fiscal package without printing money:

India has budgeted a fiscal deficit target of 3.5% for the current year. While the efforts to reduce the fiscal deficit will be a tough ask in the wake of increased funding requirement for overcoming the pandemic effect on the economy, it is essential to ensure fiscal prudence while making expenditures. The Govt. can set across a minimum fiscal stimulus package of Rs 5.5 lakh crore for FY20-21 to restore the health of the economy by Q4. On the monetary policy front, RBI should enhance the liquidity in the system to allow for larger play from the financial systems – which was initiated in the recent economic package announced by the Government.

Major large-scale fiscal funding can be raised through the below means:

  • Standard 10% reduction in budget for all ministries: Rs 3 lakh crore
  • Foreign Sovereign bonds: Rs 1.5 lakh crore
  • Subsidies rationalization: Rs 1 lakh crore

Additional funding raised through PM Cares fund, National Disaster Response Funds, and other relief funds circulated at the central and state levels can be used for the program as well.

1) Budget revision:

Since the pandemic effect is across industries, a 10% standard cut in the budget estimates for FY20-21 for all the ministries will provide a fund of around Rs 3 lakh crores. It is the time when fiscal prudence needs to exhibited, especially for new projects that does not lead to extra job creation – must be postponed for the further years. Since the actual spending were lower than the budgeted (more than 10% difference) in the previous years, this option of 10% reduction can be accommodated as it will allow for the plans to continue, while exhibiting caution on overspending in any of the planned programs. It will be considered as an equitable solution, as it includes all ministries and will ensure more accountability from the ministries.

Figure 3: Ministry-wise expenditure for 2020-21 (Rs Crores)

2) Foreign Sovereign bonds:

The Govt. can issue sovereign bonds in international markets and raise around Rs 1.5 lakh crore. Since the sovereign external debt to GDP is at 5% and one of the lowest in the world, there is a lot of room to play. Raising externally will also allow the government to not crowd the borrowings for private players in the domestic market. While operating in foreign sovereign bonds, the Govt. must exhibit caution on preventing any downgrade in credit ratings. The other catch is that any borrowings will add to the already burgeoning fiscal deficit problem.  

3) Subsidies rationalization:

Subsidies rationalization is a long-discussed reform measure that finds its opportune time during a crisis like COVID-19. The total subsidies, including food, fertilizer, and petroleum, adds up to Rs. 2.28 lakh crores. The unintended consequence of the Fertilizer subsidies (Rs 0.7 lakh crores) resulted in distortion of the fertilizer market instead of helping it – making India the largest importer of fertilizers in the world [3] – a moral hazard. Economic Survey of India 2019-20 also points to the inefficiencies in food subsidy programs, its increasing debt burden, crowding out of private trade, and its long-term distortions in the agriculture market [4]. A large portion of food subsidies are diverted to Food Corporation of India (FCI) which primarily addresses the price gap between procurement and selling prices of the agricultural output. It can be easily used for better schemes like Direct Cash Transfers (DCT) to the farmers using the JAM (Jan Dhan – Aadhar – Mobile) infrastructure – allowing better utilization of funds. The rationalization of the subsidies will provide the much-needed reform for the agriculture market while allowing a large portion of funds to address the relief measures. It is estimated that around Rs. 1-1.5 lakh crores can be redirected away from the subsidies [5].  It will also not increase the fiscal deficit of the economy.

Figure 4: Subsidies over the years [6]

Enhancing and ensuring the healthcare system preparedness:

Since the effects of COVID-19 are expected to linger longer in both the domestic and international scenario, it is essential to improve the healthcare system preparedness to arrest the spread of the virus – to prevent prolonged ill effects on health and wealth of the country. A fund of around Rs 0.5 lakh crore should be allocated to address the healthcare system readiness. The implementation should be tasked primarily under the ministry for health and ministry for home affairs.

Health workers: There are over 21 lakh health workers in India [7]. In order to protect the health workers family, an insurance of Rs 50 lakh was essential and was duly proposed by the government. With a premium of Rs 5K, it is estimated to cost around Rs. 1K crores.

Facility improvement: Doctors and health workers need to be provided with Personal protective equipment (PPE) and hospitals need to be supplied with adequate ventilators and other required medicines. The Government should also need to bear the cost of the treatment for the affected patients without an insurance cover. Around Rs. 0.25 lakh crore can be allocated for facility improvement at hospitals.

Testing & Tracing: Mass deployment of testing kits has to be ensured.  Distribution of masks & temperature measurement kits to industries and companies for regular monitoring. Since it involves a lot of personnel and for longer durations it would be wise to set aside Rs. 0.24 lakh crores for testing & tracing.

Economic relief to the affected industries & workers:

Industrial sectors: A lot of industries are facing working capital crunch and many are on the brink of collapsing. The Govt. needs to initially classify all the industries into vulnerable, pressurized, and healthier sectors. Major relief packages and stimulus should be focussed on pulling up the vulnerable sectors from collapsing. All the following measures can be treated as temporary arrangements with a timeframe till Q4 FY20-21. A fiscal package of Rs 2 lakh crores can be used for the programs. Some of the initiatives can be

  • Compensating from 1 month to a max 3-month salaries for workers in these sectors, depending on the severity impact index for the sectors. Maximum caps or percentage caps can be set for payments
  • Allowing for a maximum of 6-month moratorium on loans for these sectors
  • GST slabs can be lowered for these industries – to a minimum level of 5% for the vulnerable sectors and a reduction in one grade level for pressurized sectors
  • Government to bear 50% of the interests till Q4 for any additional loans taken by the companies in the vulnerable sector (min 3-year loans)
  • Corporate tax can be cut by around 15-30% for these sectors (proposal similar to Indonesia)
  • Compensating 1-month salary for the laid off workers (contract & permanent) in pressurized and healthy sectors

Affected workers: While the compensation for salaries in the affected industries will cover primarily organized sector workforce, a larger portion of the Indian workforce is from the unorganized sector. A fiscal budget of Rs. 2.5 lakh crores should be allocated to provide relief measures for the affected workers in the unorganized sector. Some of the measures can be

  • A temporary ration card or Aadhar to bring the unorganized workforce [8], who are not yet part of JAM trinity, for Food distribution & Direct Cash Transfers (DCT) benefits – can be treated as a reform measure
  • Ration for 3 months to be provided to all the migrant workers. Since FCI holds large additional stocks, some of it can be easily used for this purpose
  • Ex-gratia of Rs 1,000 to 3 crore poor senior citizen, poor widows and poor disabled [9]
  • Gas cylinders to be provided to 8 crore poor families for the next three months [9]
  • DCT of Rs 2500 as a one-time payment to be made to all the workers in the unorganized sector (~450 million), including agriculture – will cost around Rs. 1 lakh crore

Economic stimulus to set the wheels of growth in motion

The COVID-19 crisis provides an opportune time for the Govt. to make some bold reforms that can provide long-term benefits. Given the sentiments around global business value chain restructuring, the international scenario presents an opportunity for India to become a primary player in export markets, in the medium to long-term – promoting growth & more employment in domestic markets. While the stimulus programs primarily involve monetary policies, a fiscal package of Rs. 0.5 lakh crore can be allocated to allow for any losses due to reduction in tax rates. Some of the measures can be

  • Reduce the import duties for raw materials and promote Made / Assemble in India programs with quick disbursal of loans for export programs
  • Additional 10-20% increase in antidumping duties – to allow increased domestic market production
  • Allow quick credit support for MSMEs without extensive documentation & collaterals
  • Quick clearance of GST refunds and pending payments in Govt. departments
  • Allow for an additional one-time 25% increase in existing loans without the need for any further collaterals [10]
  • RBI to reduce the repo rate by 150 basis points to increase liquidity for the financial systems
  • Advise banking and financial institutions to reduce the interest rate by 1% in both deposits (to promote consumption rather than savings) and loans (to lesser interest burden for corporates)

References:

  1. Covid-19 Lockdown Estimated To Cost India $4.5 Billion a Day: Acuité Ratings Our Bureau – https://www.thehindubusinessline.com/economy/covid-19-lockdown-estimated-to-cost-india-45-billion-a-day-acuit-ratings/article31235264.ece
  2. National Database Of Workers in Informal Sector in the Works. Yogima Sharma – https://economictimes.indiatimes.com/news/economy/indicators/national-database-of-workers-in-informal-sector-in-the-works/articleshow/73394732.cms?from=mdr
  3. Rationalising Fertiliser Subsidy in India: Key Issues and Policy Options, By Ashok Gulati; Pritha Banerjee. https://ideas.repec.org/p/ess/wpaper/id11083.html
  4. Key Highlights of Economic Survey 2019-20, Press Information Bureau, Govt. of India, Ministry of Finance – https://pib.gov.in/newsite/PrintRelease.aspx?relid=197771
  5. Fiscal Space: Not If but How Devesh Kapur-Arvind Subramanian – https://www.business-standard.com/article/opinion/fiscal-space-not-if-but-how-120040801674_1.html
  6. Fiscal Situation Of India in the Time Of Covid-19. Balajee- Anuragh- Shekhar- Gautham – https://ssrn.com/abstract=3571103
  7. The Health Workforce In India – Sudhir Anand & Victoria Fan. https://www.who.int/hrh/resources/16058health_workforce_India.pdf
  8. Administration Plans To Issue Temporary Ration Cards To Migrant Families. https://www.hindustantimes.com/gurugram/administration-plans-to-issue-temporary-ration-cards-to-migrant-families/story-ov3CaOVVQPa5LRkbMYbdEP.html
  9. Finance Minister Announces Rs 1.70 Lakh Crore Relief Package Under Pradhan Mantri Garib Kalyan Yojana For the Poor To Help Them Fight the Battle Against Corona Virus. https://pib.gov.in/PressReleaseIframePage.aspx?PRID=1608345
  10. Impact of Pandemic COVID-19: PHDCCI suggestions for short and long term measures by the Government – PHD Research Bureau | PHD Chamber Of Commerce And Industry. https://www.phdcci.in/wp-content/uploads/2020/04/PHD-Chambers-detailed-representation-on-short-term-and-long-term-measures-submitted-to-the-Government..pdf.pdf

3 thoughts on “Designing a Fiscal Package for Reviving the Indian Economy from COVID Effect

  1. T.R.Balakrishnan

    Surya,it is excellent, you also can add the plight of farmers, for various farm products even the cost is not getting, exploitation by middle men is there.a stimus in the form of direct selling to the consumer’s has to be effected.

    Reply
  2. Bhaskar

    The good news about the grim projection by economists is that these are by the economists. They are notorious for not getting anything right. They are the classic ‘after the event experts’ so I wouldn’t worry so much about the recovery models (LUV). improvement in education system to generate more employable workers, improvement in the agriculture industry, the overall culture of quality focus is essential for not just growth but survival too.

    Reply
  3. Siddharth

    Good all round thought process to see what is actually needed in the economy. Am sure the govt. can take a leaf from your analysis and reduce the debt based options to tax incentives and reduced GST for firms to survive. And most loved POV is the direct cash transfers to the needy, so that they are insured for future work / demand.

    Reply

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