BackOpinion | The slog overs are here and we need mighty fiscal heaves now
The Centre must act fast to avert the economic devastation that the pandemic could leave behind
PremiumThe government has lifted some lockdown restrictions and is allowing certain economic activities from today. Most of the relaxations are aimed at the rural sector, though a few will also help urban India, but these are hardly enough. The clock is ticking away, and every day that the vast majority of businesses remain shut turns our nightmare economic scenario darker.
Prime Minister Narendra Modi has chosen to save lives over livelihoods, and till date, against all odds and despite some unexpected hurdles, India has done very well on that front. But, for most Indians, livelihoods are lives, and the costs the country could incur on the economic front are fast outstripping the benefits of keeping businesses closed to save lives. We may emerge from the pandemic with fewer lives lost than other countries, but we may also be condemning huge masses of people to economic ruin that many will never be able to recover from. And destitution, stress, suicide and crime could yet cause more deaths than the epidemic.
In his address to the nation last week, the prime minister appealed to employers not to retrench staff and to pay their wages. But a jobs bloodbath has already started across industries, and even the most generous companies have no choice but to reduce their workforce. Economists Renuka Sane and Anjali Sharma studied the cash holdings of 16,300 non-financial firms with total annual sales of ₹107 trillion—about 45% of India’s likely gross domestic product (GDP) for 2020-21. Assuming revenues to be zero, wage costs at the same level (no layoffs), regular maintenance expenditure at 60% of normal levels, and no change in interest payments, Sane and Sharma found that 54.8% of these companies have 90 days or less before their cash runs out. In fact, 29.8% have 30 days or less. Without interest payments, the figures drop slightly to 47.5% and 23.4%, respectively.
In this set of vulnerable companies, whose sales total about 30% of GDP, 19% are large firms with assets worth over ₹500 crore, 27% medium-sized with assets of ₹100-500 crore, and 53% small firms with assets less than ₹100 crore. One dreads to imagine the ongoing carnage at the micro enterprise level. Small and micro enterprises employ 40% of India’s workforce, but only large firms may be able to get bank loans to tide over the crisis. And it’s not as if, once the lockdown is lifted, a company will be able to immediately ramp up production and services to earlier levels, or get a large part of its customer base back.
There could be hundreds of thousands of loan repayment defaults coming up. Even though the Reserve Bank of India has tweaked its rules, a large chunk of these loans could ultimately get marked as non-performing assets, and these defaulters will see all lines of credit cut off, perhaps forever. This applies both to individuals and businesses faced with a precarious present and a bleak future, given the job and trade losses being suffered and their meagre cash in hand.
And no one, of course, talks about the middle class (definitions vary wildly, but let’s consider socioeconomic groups that form 35-40% of India’s households), on whom India depends for consumption and economic growth. Most of our middle class, including many in the upper middle category, have measly cash savings. How many of these families can survive beyond six months without their regular monthly incomes? According to a study by securities trading firm Motilal Oswal, between fiscal years 2013-14 and 2018-19, the real disposable income of households rose by 5.1% per year, while their real consumption expenditure rose by 7%. Household savings fell from 25% in 2013-14 to 20.7% in 2018-19, and 60% of those savings are locked in illiquid real estate, which is also losing value dramatically. In 2018-19, household debt was a whopping 43.1% of real disposable income. Quite simply, the middle class doesn’t have money, which led to the consumption slowdown over the past two years. Now, with lockdown-induced austerity and an uncertain future, we will consume even less.
The pandemic will pass in some months, but the economic devastation it will leave behind will last years and claim countless livelihoods/lives. The government must act fast and boldly, allow businesses to open in safe areas, change taxes and regulations, offer large credit guarantees, and print more money. Nudges will not do. In the slog overs, what we need are not nifty singles but mighty heaves over mid-wicket. India currently has the world’s largest lockdown with what is perhaps the world’s smallest fiscal relief package for a large economy—only about 0.5% of GDP as genuine new spending. This is absolutely not the time to worry about fiscal deficits.
As we all know, Modi is capable of taking huge risks—not the least being locking India down when we had less than 500 confirmed cases. If he had waited till the number went up to 5,000, as some countries did, we would be facing a horrendous health calamity. The economy is begging for a daring gambit—a New Deal. Indians are resourceful and innovative and can restore growth, but not without a strong leg-up right now. We need big thinking, not timid account balancing. And time is running out. Every day counts.
Sandipan Deb is former editor of ‘Financial Express’, and founder-editor of ‘Open’ and ‘Swarajya’ magazines
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