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Locked Economy Needs Timely & Generous 2nd Fiscal Stimulus

APRIL 21, 2020

By TIOL Edit Team

THE Covid-19 pandemic-triggered recession is lengthening its shadow over the Indian economy. The shadow has lengthened and darkened after the Government decided to extend 21-day lockdown to 3rd May from 14th April. Despite stringent measures such as sealing of hot spots or red zones, the number of cases and deaths continue to rise.

The painful fact is that we have to live with the virus for many more months safely till effective remedies are developed & scaled-up for global benefit. To live & work vigilantly, the Government must fast-track formulation of specific standard operating procedures (SOPs) for all businesses and all situations.

More important is the need to work out SOP for mass transport systems and disseminate them effectively to all stakeholders. It goes without saying that throwaway masks, soap & foot-operated hand wash systems should be installed at all entry points of public places including slums.

Prolonged lockdown is not the long-term solution to pandemics caused by unknown microbes. Any further extension of the Lockdown would only weaken India's financial capability to strengthen health services.

As it is, healthcare infrastructure is grossly under-funded. So is medical education. We need to invest at least 3% of GDP to provide adequate & good-quality healthcare for all. This was a tall order when economy was doing well with public investment in healthcare amount was roughly 1.2% of GDP. It is now a herculean task. Much bigger challenge is to rescue crores of poor who slipped into extreme poverty.

Nation-wide lockdown is a hard option with long-term grave implications for food security, health security and national security of the country. The Government should henceforth focus on containment-cum-lockdown in hot spots which should be identified through adequate and timely testing of citizens. Timely & strict containment of any infection can obviate the need for nation-wide lockdown.

With this perspective in view, the Government should quantify the loss of income during the lockdown & during the expected, phased revival of economy. Quantification is required to fix the size of fiscal and monetary stimulus.

It is here apt to cite a blog, authored by two economists from two reputed institutions. Published by the Pioneer on 4 th April, the Blog estimates that the Indian economy will face an income loss of Rs 1.7 lakh crore per week or a total of Rs 5.1 lakh crore during the three-week-long shutdown.

If we accept Rs 1.7 lakh crore/week loss as a reasonable estimate, then the loss to economy aggregates to about Rs 10 lakh crore for the 40-days lockdown ending 3 rd May. Add to this lingering effect of lockdown shock on economy and the resulting income loss. Its computation would fall in the ‘wild guess' domain at present.

No one as yet knows whether virulence would peak in May to necessitate creation of more containment zones & local/regional lockdowns. Telangana Government has already announced extension of lockdown to 7th May from 3rd May. The possibility of Covid re-surfacing as local or regional epidemic can't be ruled out. Nor one should rule out the risk of 2nd wave of epidemic in certain countries.

In its World Economic Outlook (WEO), International Monetary Fund (IMF) has assumed recurrence of pandemic. It has conceived three potential alternative outcomes of pandemic.

WEO says: "The first alternative estimates the impact of the fight against the spread of the virus in 2020 taking roughly 50 percent longer than assumed in the baseline. The second alternative considers the impact of a second, but milder, outbreak occurring in 2021. The third alternative estimates the potential impact of both the outbreak taking longer to contain in 2020 and a second outbreak occurring in 2021".

It adds: "All three scenarios contain four common elements: the direct impact of measures to contain the spread of the virus; tightening in financial conditions; discretionary policy measures to support incomes and ease financial conditions; and scarring resulting from the economic dislocation that policy measures are unable to fully offset".

We hope the Finance Ministry would keep such assumptions in mind while coming out with eagerly awaited second fiscal stimulus. It is heartening to learn that Prime Minister Narendra Modi reviewed economic situation on 16 th April. The news story's headline says it all: 'PM Modi reviews impact of Covid-19 on economy; 2 nd stimulus in consideration'

We also hope the Finance Ministry would respond positively to suggestion contained in IMF's Fiscal Monitor Report issued on 15th April.

It suggests: "In India, the fiscal stance should be eased as needed to accommodate necessary increases in public health expenditure in response to the pandemic and shield against a more severe economic downturn, using targeted and temporary measures. Once the current economic situation improves, a more ambitious, credible medium-term fiscal consolidation path is needed to bring debt and interest expenditure down. Transparency must improve, and the practice of shifting spending off-budget must be curtailed”.

It is possible that this advice might emerge as conditionality in the Covid loan negotiations between India and IMF. According to a report, IMF is likely to offer $ four billion loan to India to help face challenges posed by the pandemic.

This, coupled with applied-for billion loan from BRICS' New Development Bank, should help Government finance 2 nd stimulus.

There is broad consensus among economists that size of fiscal stimulus (0.8% of GDP) is too small to kickstart the economy. This is well below the average 3.5% of GDP committed by G20 countries of which India is an important member.

The cash-and-kind aid that Government is giving to poor is peanuts compared to cash doled out by Japan, United States and a few other G20 countries to households and small businesses. We hope the Government responds positively to the Opposition's, especially the Congress party's articulated demand for adequate compensation to the poor for lockdown sufferings including deprivation of their daily wages.

The Congress party has urged the Centre to fix the size of stimulus at 5-6% of GDP. It has also demanded that it should clear GST compensation & other pending central transfer to States.

Lockdown has led to sharp decline in State GST receipts, thereby enhancing the Centre's obligation to compensate for fall in GST revenue if it does not grow 14% annually as was the pattern with value added growth before GST roll-out. Due to persisting delays in payment of GST compensation, the States are facing liquidity crunch, thereby curtailing their capability to provide aid to poor and others rendered jobless by lockdown.

The Government should work out some imaginative schemes to help the informal sector, especially small shops and micro enterprises to avoid permanent shutdowns. For other small to large businesses, the Government should consider interest subvention scheme for working capital for three months. All banks should be directed to give working capital at 4% interest for three months. The difference between the normal and this lockdown-necessitated 4% interest should be borne by the Government as interest subsidy.

It is here pertinent to mention an allied issue of most promoters' inability to raise fresh debt with equity shares as collateral. Precipitous drop in share prices of listed companies have already reduced the value of shares pledged with lenders. This would obviously put the lenders on guard. The Government should be sensitive to the plight of promoters as the share market has crashed, both due to Covid and due to lockdown.

The sooner the Government puts in place a wholesome & adequate stimulus package, the better it is for the revival of economy. The Government should not consider it as favour to the businesses but as a wise investment for reversing steep fall in indirect and direct tax receipts.

Economic stimulus should match the speed, efficacy and stringency of lockdown.