Opinion | Locked down with a firm hand: Where is the healing touch?4 min read . Updated: 07 May 2020, 10:42 PM IST
Fiscal conservatism must not get in the way of a big spending package to relieve a country reeling under a harsh lockdown
The draconian nationwide lockdown, perhaps the most stringent in the world, which completed 40 days on 3 May, has been extended further until 17 May, with some relaxations in some districts. It could continue for longer. This has helped flatten the curve, although there is no downturn yet.
But it did shut down almost two-thirds of all economic activity, imposing massive hardships on migrants in cities and the poor everywhere. The impact on micro, small and medium enterprises (MSMEs) has been devastating. And, ironically enough, state governments, at the front lines of the battle against covid-19, have experienced a collapse in their finances, seriously curbing their capacity to do what is necessary.
In this situation, it is surprising that the Central government, so strict in implementing the lockdown, has provided barely any support or relief to help cope with the enormous collateral damage of the lockdown. The focus on migrants, poor households and MSMEs, for whom survival is the issue, or state governments that can help them survive, is simply illustrative of a much larger problem.
There are around 50-55 million migrants who work in cities—one half in construction and the other in manufacturing or transport, delivery, security, restaurants, domestic and other services—who return to their villages mostly at harvest time. It is estimated that about 25 million migrants (intra-state or bordering-states) managed to get home. The lockdown stranded the remaining 25-30 million migrants in cities far away from their homes, deprived of their work and dignity, at the mercy of shelters and food provided by state governments or charities, often hungry and homeless. Governments—Centre or states—provided no cash support, while most received no wages from their employers. This was an unprecedented humanitarian crisis. The decision to allow them to return home was announced six weeks later. It will be another month before all migrants get home.
The poor, identified as 50% and 75% of urban and rural households, respectively, who are self-employed, casual labour or informal workers, have lost their livelihoods in the lockdown. On 26 March, the government announced a ₹1.7 trillion package to help the poor, of which ₹70,000 crore are disbursements for existing schemes or drawdowns from funds available with state governments. The remaining ₹1 trillion, just over 0.4% of gross domestic product (GDP), is made up of an extra 15kg of wheat or rice and 3kg of pulses for poor households over three months ( ₹40,000 crore), and cash transfers of ₹1,500 to women and ₹1,000 to senior citizens over three months ( ₹60,000 crore). This timid response, shaped by a misguided fiscal conservatism, is far from sufficient to meet the needs of the poor in such dire times.
Government stocks of wheat and rice exceed stocking norms by 55 million tonnes. The supplementary free rations should be tripled to 45kg of wheat and rice and 9kg of pulses for a three-month period, using Aadhaar cards where the poor do not have ration cards. And poor households should be provided with cash support of ₹6,000 per month for three months.
It is seldom recognized that MSMEs are the backbone of the economy and the heart of entrepreneurial India, accounting for 32% of GDP, 24% of employment, 45% of exports, 33% of manufacturing and 25% of services in the economy. Their problems are overwhelming. Payment of wages to workers is almost impossible. Fixed costs on electricity, rent and interest have to be met. There are inventories of unused inputs and of outputs that cannot be sold. Working capital is exhausted. Reviving production, when allowed, will be easier said than done. MSMEs anxiously await a central government relief package, much talked about but still just a promise.
State governments cannot help in this struggle for survival because their finances are in such bad shape. Their income is made up of revenue receipts (52%) and central transfers: share of central taxes (26%) plus non-statutory central transfers (22%). Central transfers are bound to contract sharply in 2020-21. But the states’ own tax revenues will be squeezed far more. The goods and services tax (GST) is a double-whammy: most of their GST revenues (43% of total in 2019-20) accrue from taxes on non-essentials, while their 40% share of the Centre’s GST revenues will yield much reduced absolute amounts. For states, on average, the rest of their tax revenues come from sales tax mostly on petroleum products (25%), excise duty mostly on liquor (15%), and stamp duties or registration charges (12%). In the national lockdown, there were no sales of non-essentials or liquor, almost no registration of vehicles or property transactions, while sales of petroleum products were at most one-third the normal levels. Thus, in April 2020, tax revenues for most states were just 10% of April 2019 levels.
The sharp fall in incomes of state governments during the lockdown has been accompanied by a sharp rise in expenditures on managing covid-19. The resulting difference between income and expenditure can be met only through market borrowings approved by the Centre subject to the limit of 3% of gross state domestic product (GSDP) set in the Fiscal Responsibility and Budget Management Act. Given that there is bound to be a big revenue shortfall in 2020-21, it is imperative that states be allowed more market borrowing, by raising this limit to 4.5% of GSDP. Without this relaxation, state governments will struggle to pay salaries, and might be forced to cut expenditure on health, education and infrastructure, let alone help migrants, poor households and MSMEs.
The national lockdown was imposed with a firm hand. It is time for a healing touch that would help poor households and small firms survive, and nurse the economy back to health.
Deepak Nayyar is emeritus professor of economics, Jawaharlal Nehru University