Market sentiment is down. Unless government steps in to generate demand rapidly in the post lockdown period, the economic recovery is likely to be feeble
By Ajay Shankar
India is under lockdown, and economic activity, other than the supply of essential goods and services, is suspended. Most of those in the urban economy who are either casual labourers or are self-employed are now without income. Direct cash transfer of Rs 500 to women and free food grains are being given to mitigate distress and hunger. There is a growing consensus that this support needs to be enhanced as the poor need to buy other essentials other than foodgrain, too. As the economy is shrinking, there is a need to think of ways to get a V-shaped economic recovery in the post-lockdown period.
It is clearly essential that harvesting is facilitated so that there is no avoidable loss. With homemade makeshift masks, communication on social distancing and tracking, labour needs to be allowed to harvest, and then transport food stock to procurement and storage centres. Truck movement has to be permitted for this activity. There are no hotspots in rural India yet, and tracking abilities have become more robust. The risk in this is minimal, and it would cushion the agricultural economy, on which a large share of the population is dependent.
Market sentiment is down. Unless the government steps in to generate demand rapidly in the post-lockdown period, the recovery is likely to be feeble. There is, however, the 2008 precedent, when a stimulus package of around 4% of the GDP resulted in a V-shaped recovery within two quarters. That stimulus package had a reduction in excise duty as one pillar to generate demand. This is not an attractive option now, as government revenues were already under stress before the crisis. The other pillar was well-targeted government expenditure to generate additional demand in the short-term. This would be the right prism through which to craft a stimulus package. The sole consideration of the 2008 package was to get the economy to recover quickly. The 4% number for the additional fiscal deficit emerged ex-ante. A similar approach would be the best one now. The question to ask is where and how can additional demand be generated quickly.
The construction sector has a large multiplier effect and is labour-intensive. So, it is a natural choice. There are a large number of incomplete housing projects with developers in difficulty/bankruptcy. The FM had announced a financing package last year to mitigate the economic downturn. But progress has been slow. There were issues with the fine print of the sanction orders. A simple but bold approach could work immediately; a takeover of all the incomplete projects from the developers, and getting the banks to immediately provide financing for completion at current costs with a government guarantee, could work. A czar could be designated with a mandate to get actual work started within 45 days of the end of the lockdown, and completion within 18 months of the commencement of work.
Preparatory work for takeover, tying up finances and settling contractual terms with the construction agencies can be done now. This would not need budgetary outflows. As the economy recovers and demand for housing picks up later, then the land bank with the developers would become liquid assets and debt may be comfortably serviceable.
A step up in the ongoing affordable housing construction programme could also generate additional demand. The same would also apply to the rural road programme. The present crisis has highlighted the inadequacy of hospital care capacity. While efforts are on to create temporary additional capacity on a makeshift basis, there is a need to increase capacity by 25-50% on an urgent basis. This merits funding from the stimulus package. This would generate demand for the construction industry as well as for the supply of medical equipment and furnishings.
The automobile sector also has a large multiplier effect and has been experiencing a downturn. The lockdown has dramatically shown how clean the air has become. BS-VI fuel and vehicles are now available. But, air quality will reach European levels only after about 15 years, when all the BS-IV and earlier vintage vehicles go off the road in a business as usual scenario. A 50% reduction in the GST rate for all BS-I, II, III and IV commercial vehicles, which get traded in for scrapping at designated facilities, would create immediate additional demand. It would also give the benefit of cleaner air. Such a move is an ideal candidate for the stimulus package. The 2008 package included grants for the purchase of about 2,000 buses for use in city bus services. Something similar could also be considered.
The key criterion for choosing a project should be the level of preparation, including environment and other clearances, with the bar being the ability to absorb substantial expenditure in this financial year. Most big infrastructure projects need 12-18 months to get going, and therefore, do not merit inclusion. Projects which can be funded by financial institutions are more attractive as they do not need budgetary resources. For instance, the electricity sector can absorb large investments in upgrading the distribution capacity for the recently electrified villages. The newly electrified households would gradually want connections for higher loads for productive activity as well as consumer appliances. The upgradation of the rural distribution infrastructure may be financed through long-term subsidised loans with a moratorium of two years for debt repayment. This would give time for the financial turnaround of the discoms that the power ministry is driving.
Key would be to generate demand by the state on a scale that can get private sector demand and investment to then drive growth.
The writer is Distinguished fellow, TERI
Views are personal