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Photo: iStock
Photo: iStock

Opinion | All our fiscal options should be kept open

Finance minister Nirmala Sitharaman’s hints of further financial relief should lift the spirits of India Inc. Policy flexibility will serve the larger interests of the Indian economy

Just as economists and businesses seemed resigned to diminishing demand as a kind of “force majeure" on its own, given the weak stimulatory effect of last week’s relief package, hopes have been stoked again. The five tranches of policy measures announced by finance minister Nirmala Sitharaman may not be all. There may yet be more to come, as her media statements suggest. Asked upfront by Mint about the possibility in an interview, she said, “I am not ruling it out. I have to see how [the pandemic] develops as we go further." This seems to indicate that the government has kept an open mind on further interventions to mitigate the economic crisis. India Inc., already hit hard by a lockdown that may ease too slowly to escape a financial crunch, appears especially keen on another tranche. If corporate expectations were let down by the first five, it was largely because of the indirect and slow nature of the support on offer. There were no bailout funds for corona-stressed companies. Nor were the Centre’s commitments likely to generate ripples of transactions across various sectors and thus backstop incomes.

Most avenues of commerce have been shut now for almost two months. This has wreaked havoc across the economy. Small and medium businesses are in severe distress, as are startups and even some big companies. What began in the hospitality, aviation and real estate sectors has spread to others. It is not just a matter of fixed costs borne on lost revenues over this period, as assembly lines came to a halt and shutters came down, it is also about grim projections of business prospects in an environment of uncertainty worse than any in living memory. Many businesses have slashed overheads and jobs to stay financially viable, but cannot be sure of survival if recessionary trends gain force. A lot would depend on the country’s infection graph. If it does not flatten even by the end of Lockdown 4.0, some analysts reckon that even well-funded businesses would need to scale back their plans. A significant number could get stretched to breaking point, and some of these could collapse, causing yet another round of pain. Our middle-class, accustomed to economic growth year after year, may find it extremely difficult to adjust to such bad times. India has no social security net for urban earners, but layoffs and pay cuts are an unfortunate reality today.

Industry bailouts are frowned upon under normal circumstances as they are seen as public money being used for the better-off. These, however, are exceptional times. A large proportion of companies have been forced to suspend operations by State action. There was no option but to lock the country down. However, it is for the government to compensate in some way for the deprivations suffered. This goes for all sufferers. Moreover, too many business closures would damage the country’s productive capacity. If specific fund allocations cannot be made by the government, then it should consider acting as a big spender itself. No doubt, the government’s finances are strained and tax revenues cannot hold up. On some estimates, this year’s fiscal deficit could widen to 7% of gross domestic product, twice the pre-covid target, even without a sixth tranche. In time to come, this could put the rupee’s purchasing power at risk of falling. But if this is a risk that must be taken, then we might as well use our fiscal firepower to aim money where it would have the most immediate effect. Direct aid for those starved of money could do the job. And this includes companies, big or small.

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