Coronavirus relief package: Too small a package, not enough cash

If needed, the govt should print money to support the vulnerable, especially the urban poor; but, banks must be protected at any cost

Indeed, the announced allocation of Rs 1.7 lakh crore is 0.8% of GDP, but all of this is not additional expenditure—the FM hasn’t clarified—so the damage to the fisc could be smaller.

The government’s Rs 1.7 lakh crore relief package to help the distressed in the wake of the coronavirus pandemic is underwhelming. While one does appreciate the government’s apprehensions the fisc could keel over given the shock to the economy will be huge and tax revenues will plunge—nominal GDP, for instance, could come in at 7.5-8% in FY21—a disaster of this magnitude called for a lot more magnanimity.

One was never expecting the kind of bazooka stimulus the US Fed has announced—a stunning $2 trillion package primarily for a buyback of corporate bonds via SPVs that are to be capitalised with government equity. Such financial histrionics are way beyond the government and the Reserve Bank of India (RBI).

But, a $22.6 billion corpus at the time of such a big global calamity is not just small, it is puny. A back of the envelope calculation shows that a household eligible for all the benefits—PDS, Ujjwala, JanDhan, PM-Kisan instalment,ex-gratia payments, etc—could get a benefit of around Rs 9,500 over three months. While the lockdown alone may cost the economy close to Rs 10 lakh crore, this is not the time to be parsimonious. The government must use the fiscal lever, not priming the pump is no longer an option. If needed, RBI should dip into its coffers to extend the government a line of credit, print the money and give it to the government to spend. Given the levels of inflation, that is hardly a concern. And, to the extent inflation rises, this can be tackled later. Indeed, the announced allocation of Rs 1.7 lakh crore is 0.8% of GDP, but all of this is not additional expenditure—the FM hasn’t clarified—so the damage to the fisc could be smaller.

What the vulnerable sections for whom relief is sought to be provided—migrant labours, construction workers, underprivileged women, widows, poor senior citizens, the disabled and disadvantaged—need now is ready cash with which to buy food and essentials. The PM Garib Kalyan Yojana does a bit, but falls well short of what is needed now. The cash component of the package should have been far bigger—EPFO, Ujjwala, free cooking gas, free grain—are non-cash measures. And, the Centre is expecting states to spend from the Mineral Fund while the amount in the Construction and Building Welfare Fund is just Rs 31,000 crore.

Ideally, the cash transfers—under the Jan Dhan Yojana—should have been Rs 1,000 per month, and not Rs 500. One hopes, now, that the payments will be immediate, and not on April 1, which is a good five days away. Again, transferring cereals—five kilos of either rice or wheat to every poor person every month for three months—is a generous thought, but could be a logistical nightmare. Many have argued that it is cash the government needed to give, not grain. But, given FCI’s godowns are overflowing, and the farmers have been paid, it is not surprising the government prefers to distribute the produce.

Right now, it is the urban poor that is in greater need of support. In this context, perhaps the upfront disbursement of Rs 2,000 for farmers under the PM Kisan Samman Nidhi Yojana could have been postponed. Nor is it clear why 80 crore persons—two-thirds of the population—need to get double their normal ration entitlement, but for free, for three months; the money saved by restricting this to a smaller number could have been used for higher cash transfers to the truly vulnerable.

Also, raising the MGNREGA daily wages from Rs 182 to Rs 202 seems pointless because one is not sure how much of project work can be accomplished while complying with the social distancing norms. So, activity is likely to commence only in May or June, if all goes well.

Thursday’s announcement is purely a welfare package and doesn’t cover small firms—MSMEs—who are facing a severe crunch in cash flows. It is possible the government is looking to RBI to direct banks to loosen their purse strings and provide some liquidity to these small businesses. That would be a mistake. RBI could cut the repo rates, ensure there is enough liquidity in the system—which it is already doing—give some forbearance on asset classification, and allow borrowers to postpone repayments, though it is not really desirable. The fact is, banks are already staring at another round of loan losses—maybe Rs 2-3 lakh crore—if the situation gets ugly, and in the immediate term, their cash flows or margins will be crimped. If they disburse more to weak enterprises, it would amount to throwing good money after bad.

That would be dangerous and break their backs, leaving them with very little capital. Any additional lines of credit for industry must be funded by government, and not the banks—the banks can be the channel through which the funds are disbursed. Doubling the cap for collateral-free loans to Rs 20 lakh for Self Help Groups under the Rural Livelihood Mission is not a good idea. Hopefully, banks will not be coerced into disbursing large sums.

It is always preferable that the government leverages, the FRBM be damned; these are extraordinary times. Even if the combined fisc nudges 10% of GDP—from the current estimate of 8.5-9%—it can’t be a disaster. With the economy now expected to grow at just about 3.5-4% in FY21, it is time to spend, even if it means printing money.

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