Needed: Bold Economic Life Support to Ride out The Pandemic
India, like the rest of the world, is now engaged in a war – in peacetime- against a silent, invisible killer. India went early into a self-quarantine, but unlike some others like South Korea, Taiwan and Singapore was slow to test and now must use draconian curfews to contain the virus. This will mean a huge hit to the economy already reeling from a slow-down in 2019.
Growth in FY 2019-20 is projected to fall closer to 4% and to a little over 5 % in FY 2020-21 but will be much lower depending on how long India takes to crest the COVID-19 cycle and what actions are taken to help businesses survive during the crisis. Business surveys show an expected decline for at least 6 months – but could last longer.
India’s stock market has lost 40% of its value as foreign portfolio investors pull out. The Rupee has tumbled to Rs 76.50 to the US dollar (around 7% since January 1 2020), despite swap sales of over $ 2 billion by the RBI. The Rupee was over-valued and a much needed correction is now underway- RBI should use its huge FX reserves to smoothen the decline – not try to reverse it.
As demand crashes, and global commodity prices fall, despite the declining Rupee, inflation over the medium term is likely to come down. The RBI must cut its repo rate by at 50-100 basis points and ensure it is passed on. But monetary policy will not be enough in this crisis – as the main problem is not liquidity - but an imposed economic freeze, a disruption of production and large segments of the service economy.
RBI could in addition target certain sectors for further regulatory forbearance to reduce cost of doing business: especially pharma, auto, construction and other sectors such as tourism caught in shocks to external supply chains and travel. These could be time-bound actions for a period of 3 -6 months. More funding for MSME could also be considered by increasing assets of Mudra Bank and other banks focused on the MSME sector.
With falling oil and gas prices India should also take it as a golden opportunity to build a strategic oil reserves ; even if need be borrowing cheaply externally for this by ONGC and other major PSU's.
Bold, fiscal and industrial policy is the need of the hour and must come quickly. India does not have well-established social welfare systems. Establishing new mechanisms will take time so best to use existing systems and tweak them to suit the need of the hour.
The disinvestment programme will go out of the window. Tax revenues will also fall if the economy slows down. All told fiscal receipts could drop by at least 2% -3% of GDP. On the positive side the drop in oil prices could give India a positive terms of trade windfall amounting to as much as 1 – 1.5% of GDP depending on how long low oil prices persist. To handle the fiscal pressures, as it did in 2014-15 the government is likely to keep the bulk of the decline, and not reduce pump prices.
On the fiscal side the measures should be
Huge increases in public health spend to ensure supplies to deal with Corona on a large scale are available: medical supplies and safety kits for the health workers, medicine, health centres, more hospitals and water and sanitation must be given critical attention. COVID related illnesses should be included in AYUSHMAN scheme.
Planned closure of schools, colleges, government offices (while ensuring essential services) - enhance capacity for remote learning and diagnostics and provide health safety supplies to vital installations.
Enhance cash transfer programs for the farmers – double the PM-Kisan payment to Rs 12000/- and introduce it also for poor consumers - these could be done through BPL ration cards to start – or even through the Jan Dhan accounts.
Expand MGNREGA - especially as returning migrants will need to supplement livelihood and explore options for it in semi-urban areas, small towns.
Ensure greater supplies of basic food items through fair price shops- more widely available for the next 3-6 months.
Identify major sectors affected by links to global supply chains - especially auto, telecomm, solar and pharma and help build alternatives. Travel, hospitality, tourism sector need special support to survive the downturn in return for reduced layoffs.
The tax measures announced so far are a help but further tax simplification especially of GST for MSME, exporters is needed. Raising IBC limits from Rs 1 lakh to Rs 1 crore until April 30 a good first step – but more is needed.
Bold and decisive actions are now needed not only to reduce the spread of the disease, but also to stem the free-falling economy and provide a safety net to people and business and commerce.
