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Business News/ News / India/  How India can reboot its virus-hit economy

How India can reboot its virus-hit economy

The corona impact will badly hurt the poor, daily-wage labour and small businesses. Here’s how the govt can help
  • All the decisions have trade offs. At a time when social distancing is the need of the hour, distribution of money could cause further problems. This will need local-level decision
  • With cities being locked down and businesses being shut down, it has become difficult for daily-wage workers to live in cities. (Photo: Pradeep Gaur/Mint)Premium
    With cities being locked down and businesses being shut down, it has become difficult for daily-wage workers to live in cities. (Photo: Pradeep Gaur/Mint)

    On 21 March, trains leaving Mumbai and heading towards the eastern part of the country were packed. Media reports suggested daily-wage labourers were leaving the city and going back to their native places in eastern Uttar Pradesh, Bihar and Jharkhand.

    With the city being locked down and businesses shutting down, it has become very expensive for daily-wage labourers to continue living in Mumbai. This explains the rush to get out of the city. But with Indian Railways cancelling trains up until 31 March, many daily-wage labourers are now simply stuck without the ability to make a living.

    This is the economic cost of social distancing being practised in order to prevent the spread of coronavirus. Not just the daily-wage labourers, but small businesses as well as freelancers and those operating in the gig economy are equally feeling the heat. Of course, big business is also bearing the cost of social distancing. But big business has the money and the scale to survive the crisis.

    All this is expected to pull down economic growth in India between April and June 2020. Of course, growth is expected to fall across the world. Governments across the world have come up with rescue packages to deal with this expected slowdown in growth. The idea is to put some money in the hands of people and encourage them to not cut down on their consumption.

    In such an environment, universal basic income (UBI)-like measures will help quite a lot. The Australian government has announced that a cash payment of $750 (Australian dollars) will be made to six million low-income earners. American politicians are also discussing a one-time payment of $1,200 for individuals earning up to $75,000 a year.

    UBI-like options for India

    Let’s take a look at some similar measures which can be possibly implemented in India.

    Advance payment of pensions: This is something that the Kerala government is planning to do. Two months of pension is to be paid in advance. Over and above this, 1,000 will be paid to families not eligible for pensions. In a statement released to the press, economist, Jean Drèze has suggested that “advance payment of (at least) three months’ pension should be made immediately, to help widows and the elderly who are the most vulnerable in this crisis."

    Payment into Jan Dhan accounts: Currently, there are 382.6 million Jan Dhan accounts. The central government can directly transfer money into these accounts. At 2,000 and 3,000 per account, the total bill for the government will work out to 76,520 crore and 1.15 trillion, respectively. This will be a really mass-market measure that can help the poorest of the poor.

    Advance payment of PM-Kisan amount: The Pradhan Mantri Kisan Samman Nidhi (PM-KISAN) scheme provides 6,000 per year per family to all farmers who own land. The government can pay two out of the three instalments for 2020-21 at the beginning of the year.

    Payment to daily-wage labourers: The Uttar Pradesh government has decided to pay 1,000 to 2.037 million construction workers registered with the labour department and 1.5 million self-employed cart owners, small shop owners and rickshaw-pullers. The money will be paid through direct benefit transfer system. Other states can easily replicate this depending on the kind of data they have for construction and other workers.

    Govt can help

    There are other non-UBI measures also which can be taken.

    Increase of allocation of rice and wheat provided through the public distribution system (PDS): The Food Corporation of India has stocks of 58.497 million tonnes of rice and wheat as of March. This is much more against the mandated 21.41 million tonnes, which includes operational as well as strategic stock. This excess rice and wheat can easily be distributed through PDS all over the country. The Delhi government is planning to implement something along these lines.

    Delay goods and services tax (GST) payments: In the UK, business needs to pay the value added tax (VAT, which is similar to GST), up until middle of June. This VAT can be paid up until the end of 2020-21. A postponement in payment of GST in India is highly unlikely given the government’s huge dependence on the tax. During 2019-20, the direct tax collections (corporate income tax and personal income tax) haven’t been up to the mark. There is no reason to believe that this is going to change in the early part of 2020-21. Hence, postponing GST payments will be very difficult.

    Nevertheless, something can be done to ease the pain on smaller entrepreneurs. Currently, GST needs to be paid after the invoice has been raised, irrespective of whether the payment has been made or not. This needs to change to where the GST has to be paid only once the bill has been paid. This will help small businesses with their working capital not getting stuck.

    Clear all government dues: The Kerala government has announced a relief package of 20,000 crore. The biggest entry in the package is that of the government clearing all its dues. This amounts to 14,000 crore. This can be implemented at the national level.

    Increase in allocation to Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS): In 2020-21, the allocation to MGNREGS has been cut to 61,500 crore against 71,002 crore in 2019-20. This is primarily because as the government moves towards UBI-based payments, it is trying to cut down on allocations to other social sector schemes, without withdrawing them. With many daily-wage workers in cities heading back home, work needs to be created in the villages. In order to do that the allocation to MGNREGS needs to go up. Drèze also suggested that a higher daily wage be paid for work offered under MGNREGS. Clearing the current MGNREGS dues will also be a huge help.

    Change the definition of bad loans: The slowdown in economic activity will end up impacting small businessmen from infrastructure contractors to road transport operators to taxi aggregators to traders. These businessmen along with other micro, small and medium enterprises, have taken on loans from non-banking finance companies (NBFCs) and banks. Some of these businessmen, with excellent track records up until now, are likely to default in the days to come, as business dries up. Hence, the NBFCs and banks need to be lenient on them and defer the payment of EMIs.

    This will only become possible, if the definition of bad loans or non-performing assets is changed. Currently, a bad loan is defined as a loan which hasn’t been repaid for a period of 90 days or more. This needs to be extended to 180 days in case of smaller businesses.

    Where’s the money?

    Of course, the government should be spending more, but the question is where does it get the money from? Many economists are of the view that in times like these, the government should abandon the fiscal deficit target of 3.5% of the gross domestic product (GDP), for 2020-21. The fiscal deficit is the difference between what a government earns and what it spends and is expressed as a percentage of the GDP.

    The trouble with this argument is the real fiscal deficit of the government. Once we include the fiscal deficits of the state governments, the off-budget expenditure of the central government and the borrowing of the public sector is much more than 3.5% of the GDP. The public sector borrowing requirement, which is the sum of all the deficits mentioned above, is close to 8.5-9% of the GDP.

    This comes at a time when the net household financial savings have fallen. In 2018-19, they stood at 6.39% of the gross national disposable income. A decade back in 2008-09, they were at 10.54%. This explains why the weighted average lending rate of banks between January 2019 and January 2020 fell from 10.27% just to 10.15%. This despite the Reserve Bank of India (RBI) cutting the repo rate from 6.5% to 5.15%. Repo rate is the rate at which RBI lends to banks.

    In this scenario, the government borrowing more is likely to push up interest rates for the private sector. Many companies are already stretched when it comes to repaying debt. So, the government needs to tread carefully. While an increase in fiscal deficit may be inevitable, given that the social distancing will end up impacting government taxes as well, nevertheless, there are a few other things that the government can do.

    Recently, the excise duty on petrol and diesel was raised by 3 per litre. All the money coming in because of this move and any further increase in excise duty, should be earmarked for some of the measures mentioned earlier.

    Prime Minister Narendra Modi needs to start a relief fund. Companies need to be allowed to donate to this fund from their mandatory corporate social responsibility (CSR) spend. In fact, the government has allowed corporates to spend funds allocated for CSR on measures to fight Covid-19. Individuals donating to this fund should be allowed to make a 100% tax deduction under Section 80G of the Income Tax Act.

    As mentioned earlier, the FCI is currently massively overstocked. This happens primarily because the government through FCI and other state procurement agencies ends up buying almost all the rice and wheat that the farmers bring to it. This basically benefits the rich farmers who have enough excess produce to sell to the government. In 2020-21, the government needs to go slightly easy on this front. Of course, this will take a lot of political will.

    Finally, if the stock market recovers in 2020-21, the government needs to move fast and aggressively on the disinvestment front.

    The trade-offs

    All the decisions have trade-offs. If pension payments are made in advance or payments are made into Jan Dhan accounts, this will increase the number of people turning up at banks to withdraw money. Along similar lines, if more work or more money is offered under MGNREGS, more people are likely to turn up at the worksite. This will go against the entire idea of social distancing that needs to be currently practised. This calls for greater flexibility of decision-makers at the local level.

    Also, precise targeting is difficult. Let’s say the government wants to put money only into the accounts of construction workers who have no work because real estate projects have come to a standstill. This precise targeting cannot be currently executed. The solutions might also lead to some people benefitting more than others.

    Take the case of Uttar Pradesh government paying the construction workers registered with it. If the individuals have Jan Dhan accounts and the central government puts money in these accounts, they will obviously benefit more than others. Having said that, this is not the time for the best solutions but the most optimal ones.

    Also, this is the time when the central government and the state governments need to work in cohesion. Further, the central government will face big pressure from organized business lobbies. On the flip side, the daily workers and small businesses do not have organized lobbies or their lobbies are not as strong as the lobbies of big business. This is something that the government needs to keep in mind before it goes about announcing steps to revive economic activity in the country.

    Of course, even after all this, the government cannot force people to spend money. In the aftermath of the corona crisis, people may generally become more careful and save money than go out and spend it. As the old saying goes, you can lead a horse to water, but you can’t make it drink.

    Vivek Kaul is the author of the Easy Money trilogy

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    Published: 24 Mar 2020, 10:30 PM IST
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