The finance minister has announced a Rs 1,70,000 crore package to support the most vulnerable sections of the Indian economy. While addressing the disruption caused by the 21-day shutdown announced by the government, the package will also boost consumer demand and address the economic slowdown. To complement the fiscal measures, RBI Governor Shaktikanta Das has announced measures that have financial implications amounting to nearly 3.2% of the GDP. Dr Charan Singh, chief executive of EGROW Foundation, a Noida-based think-tank, says the government needs to do more in terms of preserving human resources, creating jobs and generating savings. He lists a series of measures to boost economic growth and to transform the slowdown-ridden economy in an exclusive interview. Edited excerpts:
The government has announced a 21-day lockdown. How will this impact the economy?
The lockdown was a must to flatten the curve and the prime minister must be congratulated for taking this bold step. The sectors which are most impacted, directly, are travel, tourism and hospitality industries. Closing of offices, schools, colleges and shopping Malls will impact all sectors of the economy now. The MSME sector is most vulnerable, and the shutdown will lead to wide-spread unemployment. The stress on industrial activity will reflect in lowering of income levels, and demand. The standing crop of wheat, due to harvesting and marketing lies in uncertainty.
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All these will trigger defaults of loans taken from commercial banks and NBFCs, and consequently, asset quality will deteriorate, and NPAs will increase. All these will need to be taken into account by the government and the Reserve Bank. Through today’s announcements, the RBI has assuaged the sentiments to an extent. The central bank may have to extend it further. Also, the policy may have to delve, into sectors and be granular.The government is facing a gigantic challenge and has to fire on all fronts. Both agriculture and industry have to be revived. But first, the government must target preserving human resources, and saving and creating more jobs, for sustainable growth
The finance minister has announced a welfare package? Still the government hasn’t done anything for the industry which is reeling under the impact of the outbreak. What can be done in this regard?
There are different aspects here. First, the situation warrants close coordination between different layers of the government and the monetary authorities. This is apparent now, after the announcement of the RBI Governor today morning. However, as in the case of the UK and the US, bolder measures are required. The government will need to step up funding, further higher up, and the RBI should lower interest rates further to complement fiscal initiatives. Maybe in days to come, this will happen. But early signals are good and now is the time to make economic agents understand that the fiscal and monetary authorities will leave no stone unturned in this endeavour.
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As an economist, I would like to stress that the Cambridge Equation does not work in difficult times. Illustratively, Unconventional monetary policy where the Fed’s balance sheet expanded four times, in three years between 2008 and 2011, inflation did not increase defying the standard result of Cambridge Equation. So, this fear that loose monetary policy will fuel inflation is misplaced during bad times. Secondly, and more importantly, in a young demographic India, jobs/growth should have a priority over inflation. Thus, in economic emergencies like the current one, the government should not be restrained by the FRBM Act and RBI should ignore its inflation targeting function. I would urge the government to please announce a pause button on both. I would go a step further and suggest, need be, during these challenging times, as an exception, go for monetising the deficit. If not now, then, when?
How can the fiscal and monetary action be more effective in these bad days?
The Union government should work in close coordination with state governments and local bodies. I have yet to see equally good recovery packages being announced by state governments, except a few. I have not seen any municipal corporation, say of Mumbai or Kolkata come ahead with relief measures and packages. Why are local bodies silent at this time? Also, the state and central governments need to work together with trade bodies, and the private sector to protect current employment levels. We have powerful trade associations, which have huge CSR funds. This is the time to deploy them actively.
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The packages should aim at harnessing the demographic dividend, India’s youth power should be productively engaged, especially in the informal sector. The biggest problem in next few weeks will be the shortage of capital, which will come under stress and banks will have to play a role. The RBI should be congratulated for enhancing liquidity. It may have to reconsider its regulatory policies and risk weights next, if credit has to be extended by banks. Actually, think of it, should Basel norms not be paused for a year? I think, central banks of major economies should approach BIS, and ask for a reconsideration of Basel norms during these difficult months.
What are your policy prescriptions to tide over the current crisis?
The commercial banks should be accommodative towards the industry, MSMEs, and individual debtors as defaults begin to crop up. In the agriculture sector, my guess is that both Rabi and Kharif will be impacted. There is no food shortage in the country, and FCI godowns are overflowing. But farmer’s income could suffer, meaning that demand will be low. The government has announced direct payment through DBT and that will have to be strengthened. The government and the RBI should consider a six-month moratorium on payments on outstanding loans.
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The government should consider an MSME Support Fund to sustain employment and keep small businesses running. This fund could be operated through commercial banks, SIDBI and NABARD.
In view of the global crisis, one can safely assume that exports will suffer in months to come. The situation will require accommodative fiscal policy, tax holidays for exporters, and RBI’s support to exporters. Also, there is a need to explore internal markets for the country’s products.
Are the rich countries and multilateral agencies doing their bit to tide over the crisis?
My question is about international justice. The rich countries, directly or indirectly, cause immense damage to global economic situation that hurts countries like India. Our human resources get impacted permanently. Dislocation and reskilling involve a cost. The mortality rate in MSMEs zooms up, and banks suffer. Should these rich countries, not bear a cost in recovery process of the poorer countries. Should the multilateral institutions not have a role in this? What type of global economic order is this where law of natural justice does not operate? The international agencies should set up a global recovery fund, and the countries responsible for such devastation should be asked to contribute to that fund, to be used in countries which suffer losses. Or in pursuit of natural justice, should sanctions against the trouble-making country not be invoked in such cases.
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Employment situation could be nightmare after the lockdown…
The government has already announced some schemes to cushion the disruption. The government should look at skilling, reskilling the labour force to convert this crisis into an opportunity.
The government has announced some medical insurance schemes for select citizens. I think that the time has come to extend medical insurance scheme to all, free of cost. The falling incomes of the poorest segments could mean fewer financial resources for medical emergencies. The ideal situation is a universal insurance scheme without seeking subscription from individuals.
What are the long-term measures needed to be taken by the government?
There should be a fiscal council for constant coordination between the Centre, states and local bodies. Another institution that could help is a permanent finance commission to assess the fiscal situation and decide on the distribution of taxes between different layers of government.
There should be an active public-private partnership in healthcare. This model has been successful in education, infrastructure and housing. Also, there should be a conceptual framework for the future of the Indian economy.
There is an urgent need to have economic framework for the country — like a strategic plan. The prime minister has given us a vision of $5 trillion economy by 2024. We need to work on it in mission mode, and have a strategy in place to achieve it, sector by sector, state by state, with milestones on an annual basis. The role of banking sector, NBFCs and financial markets should be clearly articulated in it. The scenario analysis, with challenges, should be part of that framework.
Anil Nair is Founder and Editor, Policy Circle.