A fully Keynesian approach will need to be taken by the government. People are losing jobs and production activity has come to a standstill due to the lockdown.
There is a lot of uncertainty with regards to the course of the lockdown. Hence, there is a call from all quarters to come up with a stimulus. Examples of relief measures from other countries are being cited. While the Indian government has already announced a relief programme of Rs 1.7 lakh crore for the first quarter, and RBI has followed up with a monetary stimulus of 3.2% of GDP since February, there are expectations of more.
Let us first assay what measures other nations have instituted. The US has a $2.2 trillion fiscal stimulus, which includes, giving as much as $3,000 to millions of families. EU’s total fiscal response to the epidemic is €3.2 trillion, of which, €100 billion will go towards subsidising wages so that firms can cut working hours and not jobs. The European Investment Bank will utilise €200 billion to lend to companies. Germany has a €750 billion package, with €100 billion for an economic stability fund that can take direct equity in companies, and another €100 billion of credit to KfW for loans to struggling businesses. It also has a stability fund of €400 billion in loan guarantees. France has made provisions for €45 billion for companies and workers, and €300 billion for guarantees of corporate loans. Spain is guaranteeing loans of corporates and individuals. The UK has put £330 billion for loan guarantees to businesses and has offered to pay 80% of wage bills for staff sent on leave, up to a maximum of £2,500 a month. Japan’s package totals ¥108 trillion ($993 billion). It includes cash payouts worth more than ¥6 trillion to households and small and midsize firms.
So, what could be the options for the Indian government? The first would be an extension of the Rs 1.7-lakh-crore, or 0.75% of GDP, stimulus for another quarter, which will effectively target the neediest. The government has already aggressively delivered this part of the story to the lower-income groups. And, with the lockdown expected to extend further, in different forms across the country, a second-round extension may happen.
The second possibility is setting up a fresh coronavirus fund for various industries that have been impacted adversely. If industries like automobiles, textiles, aviation, hospitality, etc, are affected most acutely, the fund can be used to provide support. This would necessarily be targeted at the registered units where industry associations will play a role in the identification of firms. The fund can support either through direct lending or guarantees given for bank loans. Direct lending is not the job of the government (though nothing stops this from being done), and hence, the latter looks more feasible.
The third is in the area of taxation. Following the example of Western governments that have talked about giving a fixed sum of cash to everyone, the relief programme outlined above can be supplemented with a cash payment to all taxpayers. This can be of a fixed amount, say Rs 10,000 per taxpayer. It is easy to identify and implement. There are around 5.5 crore taxpayers, as per FY19 records, and giving this sum could cost Rs 55,000 crore. This can be further segmented by the government to exclude those in the higher income groups.
Fourth, the government can work on giving further concessions to the corporate sector. While cutting the tax rates for a loss-making company may not help, concessions on depreciation can be made, which will help companies. But, this will mean a drop in revenue for the government.
Fifth, the government can also consider halving the GST rates to lower the prices of goods and boost demand. This can be time-bound for this year and can be rolled back to normal in FY22. It should be remembered that on account of the loss of jobs and sharp salary cuts, the ability of people to spend will get restricted. By lowering prices, real purchasing power can be increased, which in turn will help to create demand, and this may gradually help revive growth.
Sixth, the government has to definitely roll back the cuts in DA and pensions that have been invoked for central government employees as it affects the income and livelihood of people. The decision not to pay these amounts is antithetical to the advice given to private companies to continue to pay their staff and desist from layoffs.
Seventh, PSBs can be provided with additional capital by the government to be used specifically for lending to the affected sectors. Here, there is no revenue loss, but a capital cost, which will make banks stronger by keeping them better capitalised.
Quite clearly, all this requires a substantial amount of spending and cuts in revenue. There is a high cost that has to be borne but is essential. So far, the targeting has been limited to weaker sections. The amount involved is quite reasonable at the macro-level, but very low at the micro-level given the number of people involved. The central government has to take a stance on the amount of fiscal deficit that it is willing to bear. Doubling of the fiscal deficit from Rs 8 lakh crore to Rs 16 lakh crore may not be out of place here.
In the last five years or so, the government’s response to challenges, faced by sectors, has been more in terms of policy changes related to procedures or removal of administrative impediments. While this is useful, they do not directly contribute to demand, which is the requirement today. RBI has stepped in quite proactively to ensure the flow of credit to specific sectors, with SMEs, NBFCs and real estate, in particular, being the beneficiaries.
The approach to be taken this time has to be fully Keynesian in nature, and there is little choice. People are losing jobs, and production activity has come to a standstill due to the lockdowns. There is enough evidence to show that all countries are aggressively doing the same. Paying attention to FRBM norms does not make much sense at this time as survival and sustenance are importance. More important, these steps should be invoked immediately, before it becomes late as lives of several are involved.
The author is Chief Economist, CARE Ratings
Views are personal