View: To lock down any further will devastate the economy, almost to a point of no return

Economy


By Omkar Goswami


Imposing a nationwide lockdown involving 1.3 billion people for 40 consecutive days is hard enough. Getting out of it could be harder still, unless we are crystal clear and totally unambiguous about our basic intent.

Let me start by stating something upfront. In today’s scenario, and for the foreseeable future, there will be enormous conflicts between epidemiological concerns of health and the basic rationale of earning a livelihood.

Moreover, given the nationwide fear of the pandemic and anxieties about how it may overwhelm the country’s sparse medical facilities, I suspect that when there is a hard choice to be made between health and livelihood, politicians may veer in favour of health.

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The economic consequences have been devastating. On April 23, I interacted with three outstanding empirical economists who shared their estimates in considerable detail.

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Though subject to corrections, what they suggested is that real GDP growth will contract from around 5.5% in 2019-20 to –0.4% in 2020-21. That assumes a wasted first quarter (April-June 2020), a tortuously limping second quarter (July-September), followed by some recovery in the latter half of the fiscal year.

If these estimates turn out to be true, this will be the deepest contraction that India has seen since the downturn that occurred in 1979-80, when real GDP growth plummeted from 5.5% in the previous year to –5.2%.

That’s not all. Without goods and services being sufficiently produced and sold, goods and services tax (GST) revenues will plummet to the detriment of the Centre and the states. There will be no disinvestment worth the name. Some heads of expenditure, such as health and public delivery of foodgrain and rations, will necessarily increase, while others such an interest payment on past borrowings will never decrease. The fiscal deficit will burgeon.

Work From Office
How can one mitigate this disaster? The key to it lies in getting people back to work as soon as possible, with such safety as can be feasibly maintained.

It is vital to get India’s myriad micro, small and medium enterprises (MSMEs) as well as construction activities back on track.

These are huge in sheer numbers and generate the highest employment per rupee of output produced. They will face two problems, both of which can be solved by some determined action of GoI.

The first is how to get the workers back. For that, it is best to utilise Indian Railways. Starting from the first week of May, have limited-stop passenger trains with sufficient railway police and sanitisation running from the interior to the main manufacturing and construction hubs. Regularly operating 50 key routes should suffice.

The second is to ensure that MSMEs and construction businesses get desperately needed working capital. Despite the accommodating moves made by the Reserve Bank of India (RBI), the financial tragedy of India today is that banks are flush with liquidity, but are unwilling to lend. The fear of bad loans has transformed our bankers, especially in the public sector, into stuffers of money in pillow cases. Here, the finance ministry has to step in.

Public sector banks account for 60% of bank credit. Finance minister Nirmala Sitharaman can explicitly direct these banks to lend working capital to MSMEs with two temporary catalysts – a sovereign back-stop facility of up to 15% of such MSME loans in the event of default; and RBI sufficiently relaxing MSME default norms for the first six months of 2020-21.

MSMEs aren’t big defaulters. Large enterprises are. All these small entrepreneurs need is help with the first round of working capital. Why can’t this be announced as soon as possible?

With much lower tax revenues and disinvestment receipts and possibly no lower expenditure, how can one create sufficient fiscal and monetary stimulus? Estimates suggest that for this stimulus to have any meaning, it ought to be around 6% of nominal GDP. As of now, the fiscal stimulus is entirely inadequate at 1% of GDP. Basically, we will have to depend upon domestic funds, and print money like never before.

No economist is worried about inflation for at least the next six months. A substantial stimulus, coupled with much greater assistance to the states for the first half of the year, should lift demand as well as supply — with the supply increases putting a damper on inflation. It is time to think out of the box, as John Maynard Keynes did in 1936.

Doors Have Started Closing

We must get people back to work as soon as possible. We have to open our manufacturing and services sectors.

Up to now, we have been fortunate with our infections, and more so with our morbidity rate. Hopefully, with suitable safeguards, these won’t spike alarmingly as people return to work. To lock down any further will further devastate the economy — almost to a point of no return.

It is time to totally lift the lockdown from May 4. Let state governments continue making their call between health and livelihood. Some will opt for full lifting. Others won’t.

But after 40 consecutive days, it is time for earning a livelihood. The lockdown was like the chakravyuh that you can enter, but never exit. So, cut the Gordian knot.

The writer is chairperson, Corporate and Economic Research Group (CERG) Advisory



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