Antidote for the Indian Economy
It is needless to say that the COVID-19 pandemic not only poses challenges to the healthcare systems but also to the economic systems across the globe. The Economist Intelligence Unit lowered India’s real GDP forecast to 2.1% from earlier estimate of 6% for fiscal year 20-21. As the COVID-19 gazes at our economy with a potentially cataclysmic economic meltdown, we discuss few of the possible measures that India can take to fight against the pandemic along with the steps that have already been taken:
FOODGRAINS
India should distribute foodgrains to the entire population. As per Food Corporation of India (FCI), as of March-2020, India has 58.5 million MT of foodgrains stock in the central pool (30.98 million MT Rice and 27.52 million MT wheat). India can distribute 10 KG of foodgrains per month per citizen for 8 months from FCI central pool even without any further procurement and assuming that 100% of the population opts for the scheme. If it is assumed that 20% of the population would either waive the benefit or will redistribute the foodgrains received, the foodgrains can be distributed, without any further procurement, for 10 consecutive months. It would be prudent to say that India has a strong defense interval to combat against the shortage of the foodgrains. Therefore, in the present crisis-like situation, instead of providing benefits to select-citizens, it would be pragmatic to provide the benefit to the entire population.
Since the quality and the quantity of the human resource directly affect the growth of an economy, by ensuring the availability of the food, India can prevent the deterioration in the quality of the health of the workforce. For once the lockdown is ended, the economic activities can be resumed with the least possible friction on account of non-availability of the workforce due to health related issues.
As per the announcements made by the Hon'ble Finance Minister, 80 Crore people will be distributed 5 KG of wheat or rice each month for the next 3 months for free over and above the 5 KG already being distributed i.e. 10 KG of the foodgrains will be given for next 3 months from the central government. Besides, 1 KG of pulses for each household will also be distributed for 3 months.
NO LAYOFFS
With unemployment rate already hovering at 6.1% in 2019 being the highest in the last 45 years in India, even prior to the outbreak of the pandemic, the Indian workforce is now more vulnerable to losing jobs than ever after the independence. If mass layoffs start taking place, then it would, arguably, be the most severe factor in the chain of catastrophic events. With some estimates already showing the unemployment rate having risen to as high as 8.7% in March 2020, it is feared that the unemployment rate may shoot up to 20% if mass layoffs take place.
Currently in India, many companies that have taken 90-day no-layoff pledge in the midst of the pandemic, which is a commendable step. India can draw the inputs from the UK and Denmark to devise a policy to combat against the steep rise in unemployment. The UK and Denmark have, respectively, proposed to provide grants, in the form of reimbursements, of up to 80% and 75% of the salaries paid by their employers. This will ensure that all the employees would receive 100% of their salaries, while employers bear only 20-25% of the financial burden of the same. Instead of granting 75-80% of the salaries, considering the huge population and layoffs in recent times, India can grant, to reimburse, a certain percentage of the salary of the employees to prevent massive layoffs.
FISCAL MANAGEMENT
The Fiscal Responsibility and Budget Management Act (FRBM Act) 2003 not only provides target fiscal deficit but also imposes the restriction on the extent to which the government can deviate from the said target. ‘Escape clause’ restricts the quantum of the deviation from the target fiscal deficit, which, as of now, cannot be more than 0.5% of the GDP. And such a deviation is permitted only in certain predefined situations. The government can consider amending the FRBM Act in a manner that would allow tweaking the fiscal deficit targets to effectively implement the measures to counter against the economic meltdown due to the pandemic. Amending the Act to accomplish a desired outcome may seem a far-fetched measure, but given the magnitude of the economic meltdown that the pandemic poses, amending the Act should not completely be ruled out.
In addition to widening the fiscal deficit to implement the measures, the government and the RBI can carry out Quantitative Easing (QE) and consider using a highly unconventional, and unprecedented monetary tool: Helicopter Drop. QE involves injecting liquidity in the system and bringing down the interest rate by increasing the money supply, and not just by lowering the benchmark policy rate i.e. Repo Rate. Helicopter drop involves printing bank-notes and distributing that in the hands of the people. As of now, there are 380.8 million accounts, out of which little over 80% are operative; with JAM and UPI, ‘helicopter drop’ can directly be undertaken in nearly 305 million accounts opened under the Jan Dhan Yojana. However, as explained below, the total beneficiary accounts could be as high as 880 million.
If executed properly by having technocrats and bureaucrats onboard, QE and helicopter drop, both, being the highly inflationary, sometimes also referred to as hyperinflationary, measures could help India combat the recessionary pressures created by the pandemic. However, such measures must be taken with the utmost diligence; guidance to the foregin investors, rating agencies, and markets, as a whole, must be provided in a manner that would keep the image of India’s commitment to prudent fiscal management intact. Any mishap in providing guidance or disseminating the information, i.e. if PR is not managed properly, then it could result into a downgrade of India’s sovereign-rating below BBB- i.e. from investment grade to junk grade, and that could permanently impair the ability of our country to attract foreign capital.
The RBI on 27th March, 2020 announced a QE-like program that would inject a total liquidity of ?3.74 trillion to the system. Liquidity to the tune of ?1.00 trillion will be injected through Targeted Long Term Repos Operations (TLTROs), in which auctions of targeted term repos of up to 3 years tenor at a floating rate linked to the policy repo rate. The RBI brought down CRR by 100 bps from 4% to 3% till 26th March, 2021, releasing ?1.37 trillion for the banks. Under Marginal Standing Facility (a mechanism through which banks can borrow a certain percentage of the Net Deposits and Term Liabilities-NDTL with the bank from the RBI at 25 bps over and above the Repo Rate), the RBI increased threshold for borrowing to 3% of the NDTL till 30th June, 2020 from earlier 2%, providing additional ?1.37 trillion of liquidity to the banks.
As per the announcements made by the Hon'ble Finance Minister, cash transfers under PM Kisan scheme, the first installment of ?2,000 will be transferred to the accounts of 86.9 million farmers in April. The scheme provides ?6,000 per year to eligible farmers. Under MGNREGA, regular wages will be hiked from ?182 per day to ?202 per day, benefitting 50 million families. The hike in wage is expected to give additional income of ?2,000 per worker. To the eligible senior citizens, widows and handicapped, a one-time amount ?1,000 will be transferred in two installments over the next three months, benefitting 30 million people. However, the need of the hour is not to identify certain segments of the people as eligible beneficiaries of the schemes, rather, at present, a certain sum of money should be transferred to every Aadhar-linked bank account. In March, 2018, nearly 88 Crore savings and current accounts were linked with Aadhar. If each unique account, identified from PAN, is transferred a certain sum of money, then even after accounting for error, i.e. privileged people receiving the money, a huge impetus could be provided to the economy. How much to transfer and what could be effects of it should, ideally, be left in the hands of the technocrats, bureaucrats, and needless to say, the public office bearers.
TARGETED ASSISTANCE
MSMEs account for almost a third of India’s GDP and a third of manufacturing output, and they are likely to be affected significantly by the pandemic. Also, they are consumer facing and export dependent entities (MSMEs account for approximately 45% of India’s exports), and due to the lockdown within the country and restrictions on cross-border trade, it becomes imperative for our country to help MSMEs remain in a state that after the lockdown they can attain normalcy. This could be accomplished by centre providing grants or loans at concessional rate of interest to District Industries Centre, State Financial Corporations, State Small Industries Development Corporations, State Industrial Development Corporations/State Industrial Investment Corporations, SIDBI, NABARD, etc. mandating them to extend loans at concessional rate of interest to MSMEs. The centre could also float a Fund of Funds (FOF) to accomplish the said objectives. Apart from providing grants and loans at concessional rate of interest, the centre can also provide guarantees for the loans already raised by the MSMEs and insure their receivables and can push for a formal market for bill discounting and/or Asset Backed Securities (ABS).
CHANCE FOR INDIA INC. TO EMERGE ANTIFRAGILE
‘Indian debt market is too small, especially the corporate debt market’ has become ubiquitous in any conversation related to the debt markets. In early 2019, the size of the US debt market and Indian debt market stood at $42.8 trillion and $1.9 trillion respectively. The composition of which is shown in the following graphs:
Composition of the US debt market
Composition of the Indian debt market
With RBI mandating deploying funds obtained by banks through TLTROs in investment grade corporate bonds, commercial paper, and non-convertible debentures, out of which 50% to be injected in primary issues and 50% to be injected in secondary markets, not only fresh funds will be injected in the system but also the evaporation of liquidity can be prevented as ?1.00 trillion will be injected in the corporate debt market, the size of which is approximately ?40 trillion. So, in the fragile condition of the corporate debt market, with the new funds injected, the corporate debt can grow out of the adversities. As Taylor Mason, one of the lead characters in the Showtime TV show Billions once said, ”become antifragile or die”, and it is the time for India Inc. to emerge antifragile.
We all have witnessed an exponential growth in the number of COVID-19 cases, which has posed all sorts of challenges to the world, and if the crisis is handled as effectively on the economic front as being handled on the medical front, we are more likely see another exponential growth but this time in the recovery of the Indian GDP.
Published by Hansa Rathod, Punit Pujara
?References:
https://fci.gov.in/stocks.php?view=46
CA || LLB || Cleared CS Professional || US CPA (Licensed - Washington) || Ind AS (ICAI) || Bachelor's in Hindi || B.Com
4 年Keep up the good work !!!
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4 年As far as Indian economy is concerned, government have to take such measures that planning of agriculture produce and plantation of crops to be done according to Supply and demand of domestic as well as international markets.So that the treasury of government will be saved in the name of Minimum Selling Price (MSP) and pockets of farmer also not going to be damaged. Above steps needs to be done alongside with recovery COVID-19.
MBA@University of Birmingham, Ex-EY I CMT L-2 Aspirant I
4 年Impressive write-up??
Chartered Accountant
4 年Heard a lot about you from Chandan.........Great Work Punit.
Chartered Accountant | | Pursuing CPA
4 年Generally people see the impact of COVID-19 but you both have observed the impact, which considers overall impact in the economy. Great work Punit Pujara Hansa Rathod. It is worth sharing