May 13-17 was a five-day streak of daily announcements by Finance Minister Nirmala Sitharaman focusing on addressing the economic fallout of the global pandemic. Needless to say, the situation is unprecedented as the global economy contracts in the present financial year.
One of the key points worth recognising about the present situation is that the fundamental problem is of the economy being partially shut due to social distancing measures which includes lockdowns. This creates the problem of a mismatch between the cash-inflow and cash-outflow of companies as their legal liabilities and fixed expenses continue to occur even as they’re unable to undertake any economic activity.
It is this cash-flow mismatch that government has tried to address by first providing regulatory forbearance, tax deferrals and then by the Reserve Bank of India (RBI) providing a moratorium on equated monthly instalments (EMIs). These measures were provided immediately after the announcement of the lockdown along with Pradhan Mantri Garib Kalyan Yojana that aimed at providing direct cash to the poor and vulnerable sections within the first 24 hours of the programme. The focus was clearly on containment of the financial stress and to absorb if not mitigate a part of it through policy intervention.
Questions have been raised on the fact that the bulk of the package has come in the form of credit guarantees for businesses and not in the form a large fiscal stimulus. If we were to look closely this is line with similar approaches to the covid response all around the world.
Japan, for instance has announced a package of around 20% of their economy, however, their fiscal expenditure is going to be much smaller as a lot of the package includes cash payments, interest free loans, delayed tax payments and travel and tourism coupons. Similarly, UK has announced a package that adds up to 15% of its GDP while US has already provided for a $2 trillion stimulus. They all include credit guarantees, cash transfers, tax deferrals along with other measures. Thus, in many ways, India’s policy playbook is consistent with what has been done by all major economies world-over.
Similarly, there has been a concern about tax refunds and vendor payments. These payments should ideally be paid out on time and the government has since September 2019 tried to put in place a robust structure to clear out all dues automatically within a stipulated time frame. This is, at present a work in progress. However, by clearing all these dues within the next few days, government ensures that micro, small and medium enterprises (MSMEs) will have adequate cashflow coming in. Moreover, by limiting the participation of companies in tenders up to Rs200 crores, it has created a sizable market for MSMEs to cater to which should help them scale up over a period. The key problem has been that for decades, successive governments have romanticized with the idea of small to the extent that it has penalized those that started small but grew to become big companies. The change in the definition of MSMEs is a step that aims to correct such a distortion.
The approach adopted in addressing covid-19 pandemic has been of combining fiscal policy, monetary policy, macro-prudential policy and reforms. Each of these four tools has been used together and the governments’ Rs20 trillion package, combined with reforms, has been unveiled. A major part of the present package is the credit guarantee for the MSMEs and most economies, whether developing or emerging markets have announced similar measures. This is important as it ensures a sustained availability of finance for small and medium companies while also ensuring systemic liquidity. As is the case, access to credit has long been a major bottleneck for MSMEs for years and this new mechanism will hopefully enable them to obtain growth finance.
The government has gone for a step-by step calibrated approach because we are responding to an uncertain evolving economic situation. It is worth remembering and taking lessons from the response to the 2008 financial crisis which perhaps had the unintended consequence of severe moderation in growth, double digit inflation and the currency losing its value resulting in the taper tantrum episode of 2013.The key advantage of the present approach is that it takes a holistic view of the present crisis as an opportunity to unleash several long-pending reforms that have the capability to unshackle productivity. These reforms have been backed by fiscal and monetary measures with the intention of mitigating a part of the economic costs. The idea is to address the key vulnerabilities faced by Indian businesses and create an economic system that is geared for allowing companies to scale and grow.
Reforms in areas such as agriculture, regulatory systems and creation of a unique single window system for attracting global companies take ahead the Goods and Service Tax, Insolvency and Bankruptcy Code, Real Estate Regulatory Authority and the September 2019 corporate tax cut. The focus is clearly on transforming the Indian economy and having a greater share of manufacturing by integration of India in global value chains. Therefore, the approach towards handling the economic fallout of the pandemic is to use this opportunity to do a systemic reset.
The success of the package will depend on whether it manages to revive growth from the second quarter.
Addressing the cash-flow mismatch combined with the reforms, however, will likely have a positive impact. This impact will not just be felt in the long run but also in the short term once the lockdown is lifted and economic activity resumes.
(Vivek Singh is additional private secretary to the finance minister. Karan Bhasin is a Delhi-based independent economist and a policy researcher. These are authors’ personal views.)