How to overcome challenges of stimulus demands

Narendra Modi, the Prime Minister, and Nirmala Sitharaman, the Finance Minister, face the most daunting challenge that was ever faced by any of their predecessors since 1947. Economic recession is worst ever faced including the “Great Depression” of the 1930s. The challenges faced by Modi and his team are extraordinarily unprecedented in mankind’s history.

As per the IMF, “For the first time since the ‘Great Depression’ both advanced economies and emerging market and developing economies are in a recession. This is a crisis like no other, and there is substantial uncertainty about its impact on people’s lives and livelihoods. Policymakers are providing unprecedented support to households, firms, and financial markets, and, while this is crucial for a strong recovery, there is considerable uncertainty about what the economic landscape will look like when we emerge from this lockdown. … Emerging market and developing economies face additional challenges with unprecedented reversals in capital flows as global risk appetite wanes, and currency pressures, while coping with weaker health systems, and more limited fiscal space to provide support.”

Look at the array of experts advice and demands for stimulus to include: (1) eminent economic personalities advising huge stimulus packages by drawing parallels with advanced countries; (2) Chief Ministers particularly of Opposition Party ruled States; (3) Organized Sector Honchos to include wide cross-sections from large corporate houses to medium business enterprises and small scale industries; (4) big and medium real estate houses; (5) exporters; (6) hotel industry from 5-Star to Restaurants; (7) I-Maxes and Cinema Halls besides Bollywood and others; (8) media houses; (9) farmers; (10) informal workers; (11) migrant labor; (12) students; (13) Advocates; and so on. Add to them, the burden of evacuating stranded nationals/student on foreign shores and also migrant labor and supply free food items for those lakhs of people housed in shelters.

Not to be brushed aside is the aggregate amount of gross NPAs of Public Sector Banks and Scheduled Commercial Banks (SCBs) were Rs. 8,06,412 crores and Rs. 9,49,279 crores respectively, that is a total of Rs.17,55,691 crores, as per RBI provisional data on global operations, as on 31.3. 2019. The list of demands projected by the State Governments (Rs. 20 to 30 lakh crore) and the Industry (Rs 14 lakh crore to Rs 16 lakh crore) alone amounts to Rs.34 to 46 lakh crore. Ashok Gehlot, the Chief Minister of Rajasthan has alone demanded Rs. 1,00,000 crores for his State.

The first relief package is Rs.1.7 lakh crore or about 0.8% of GDP. Confederation of Indian Industry (CII) has suggested a stimulus package equivalent to 3 percent of GDP which would add Rs 6 lakh crores to the available firepower. Enhanced debt to GDP ratio can be a way out for adding fiscal space at a time when the debt to GDP ratio is modest in India. No need for intellectual wisdom of exceptional order to highlight that to bounce back from the pandemic quickly, India needs a “BIG” stimulus package. But, how BIG? Surely, it cannot be the total stimulus package somewhere around to Rs. 100 to 120 lakh crore or 50% to 60% of GDP in one go with no accountability.

Noble Prize laureate Abhijit Banerjee stated “We really haven’t decided on a large enough stimulus package. We are still talking about 1% of GDP. The United States has gone for 10% of GDP.” The problem of western-based Indian economic experts lies exactly therein. And, they compare India with either the USA (34 crores population with nearly over 7 times GDP and many times over GDP PPP) or China and suggest prescriptions that may not be relevant and appropriate to Indian demands and availability. They fail to realize that the Government machinery led by Modi is also contemplating over such a key issue and have formulating plans to implement stimulus packages in stages.

For example, former RBI Governor Raghuram Rajan from the USA has stated “there’s little choice for the government but to provide a bigger stimulus to revive demand. Many have argued that while India’s lockdown has been the harshest, its stimulus package is one of the smallest — so far. To fund a bigger public spending program, the government has either to print more money or issue new bonds to be subscribed by the banks.” P. Chidambaram wants “Cut GST [Goods and Services Tax] rates by 50%.

To provide a perspective, the demands of industry honchos are recounted. Niranjan Hiranandani, president, Associated Chambers of Commerce and Industry of India (Assocham), highlighted that “The economy needs a stimulus package of at least about Rs 14 lakh crore, including around Rs 2.20 lakh crore fertilizer dues, payments from public sector companies, and tax and other refunds.” Hiranandani suggested a 5% GST cut for 6-months will cost (the government) Rs 3 lakh crore. DK Aggarwal, President of the PHD Chambers of Commerce and Industry, demanded “an increased stimulus relief package of Rs 16 lakh crore.” Demand can also be created by paying another Rs 80,000 crore through a direct cash transfer to farmers. “Pay them each about Rs 5,000 additional cash,” he said. Micro, small and medium enterprises (MSMEs) are on the verge of closure due to liquidity crunch and other issues, he added. “They need about Rs 2.80 lakh crores in terms of low-cost credit and other incentives.”

Even the print media industry has suffered losses to the tune of Rs 4500 crores during the months of March and April, the Indian Newspaper Society (INS) said on Wednesday and is seeking a relief and stimulus package for the sector that employees three million people directly or indirectly.

Exporters, particularly small units, are on the verge of closure, said Sharad Kumar Saraf, president, the Federation of Indian Export Organizations (FIEO). They have no money to pay wages this month, he added, disappointed at the extension of the lockdown.

Furthermore, the “Realtors” have started urging State governments to reduce stamp duty to 1% for 4 months and seeking stimulus package to save jobs.

In sum, Modi and Sitharaman duo assisted by their team of advisors face an uphill challenge to overcome to satisfy all sections of society. Surely, the government is aware of the downturn of the economy and wants to revive it expeditiously. How do you decide a right package and in what stages is not an easy task? First, the exact requirement needs to be determined. Modi has already highlighted that they are taking a “Calculative and Calibrated” approach to resolve the problem.

Be that as it may, Gita Gopinath of the IMF has highlighted “TARGETED STIMULUS”, which is most critical to ensure the revival of economy and welfare of Aam Admi. Whatever stimulus package is provided by the Central government particularly to industrial houses, real estate houses, etc. must be linked to outputs – jobs created and business turnovers.

Most important is also the transfer of subsidies and welfare packages to beneficiaries through the process of “Direct Benefit Transfer” which must be the sole means adopted and implemented. It implies that the State governments cannot demand stimulus allocations for welfare activities sponsored by them. At the same time, release food grains for the BPL families at nominal prices like Rs.1 per kg of rice, based on their “authorized cards”.

Kudos to Abhijit Banerjee who has pitched “for direct cash transfer to 60% of the population, issuing temporary ration cards and using ‘national’ Aadhar cards to help the poor. He has welcomed moratorium on debt payment for the current quarter but wants it to be permanently canceled and not rescheduled. He felt enhancing the purchasing power of people could actually help MSMEs more. “It is more about reviving demand.”

Thus, the Central and State government machinery must formulate a well-defined format or mechanism to monitor the expenditures incurred, jobs revived and business turnovers, as one expert has suggested drawing lessons of the TARP mechanism used by the US during the 2008 crisis.Otherwise, sooner than later would emerge that the stimulus package funds have been transferred to safe havens abroad by “Hawala Means” or used as “Corpus funds” by political parties for the next round of elections. Monitoring mechanisms must be highly effective and stringent laws to violators of criteria must be enacted and implemented. Otherwise, the revival of the economy will remain a mirage in short term context, and the Welfare of Aam Admi would remain a forlorn hope.

None can deny that the central government, and the Reserve Bank of India (RBI) are doing everything to ensure factories resume operations. They have announced lifting lockdown restrictions on industries located in rural areas. And, they have also eased restrictions on real estate construction activity in urban areas and industries. So, the supply-side activity is going to resume sooner than later. What about the demand side? And, the demand may not pick up easily due to crunch in “disposable savings” that may remain for quite some time.

There is a breach of trust between the state and the migrant laborers which will come out glaringly once the lockdown is lifted. Most of them are likely to rush back to their families in villages, as if they are freed from jail. And, it will take quite a long time for them to reconcile and come back to cities. So, the farms and factories, especially MSMEs, in the relatively developed states of western, southern, and north-western India are likely to face labor shortages for many months, maybe years to come. This will lead to more mechanization of farms and factories in these states. In Punjab, for example, most of the wheat harvesting is already done by harvest combines, and now, even the planting of paddy will be rapidly mechanized.

Let me briefly review the state of finances of the States. It is common knowledge that there are shortfalls of revenue collection due to GST compensation, petroleum, and diesel sale, stamps, registration and vehicle tax revenues, liquor sale revenues. And, the shortfalls will continue also into the third quarter of the current financial year.

So, the States demands include relaxation in borrowing limit from open market and the RBI; raise to 60% Wage and Means allowance interest-free advance from Reserve Bank of India (RBI); 6-month interest-free moratorium on payment of loan installments and the principal amount of loan taken by the state government, its boards, corporations or companies (including Power Companies) from the Union Government and its various institutions; compensation of GST until 2027 from existing until 2022; 50 percent procurement of agriculture crops on MSP instead of 25 percent; a scheme for payment of salaries to workers by the MSMEs that are not in a position to pay the salaries and wages to their laborers by bailing out employers; and, a national plan for the return of migrants in a phased manner using special transport.

Let me reproduce the extracts of the article on “Kickstarting or Rejigging Economy” : Speed is the essential parameter; Direct Beneficiary transfers are good ways to provide needy succor to the real beneficiaries.”; both the Central and State governments must formulate a slew of policies and campaigns meant to push people back to work, encourage business confidence and protect as many companies from failing as possible; Prudent policy would be to delay payments (tax filings, student debt payments, and small business loan payments); austerity particularly extravaganza must be curbed; present fiscal policy responses are primarily aimed at cushioning the blow to households, and firms by lowering interest rates and deferred EMI payments, etc., to promote liquidity in financial markets; and even, the private sector needs to be financially assisted to restart those firms that have gone bankrupt to restart firms, rehire workers and reactivate supply chains in order for the economy to rebound once social distancing restrictions are lifted, particularly small- and mid-size firms through loans.

Of utmost importance is to attract finances to the State’s exchequer by announcing one time-Voluntary disclosure scheme through “Covid-19 Bond” schemes so that all the large amounts kept in foreign banks and other safe havens inside the country are deposited in banks. After all, it is common knowledge that 50% of the economy is due to black money. The War on “Economic Pandemic” has just begun. To win the war, many more battles have to be fought on all fronts. There are no magic wands available to win the war of economic depression or recession.

To sum up, Modi-Sitharaman duo are under virtual seize from both ends: Covid-19 War; and the “Stimulus Package” warriors. The majority are aware that limited means are only available to satisfy numerous claimants. Surely, the government machinery is getting all the inputs on a daily basis from all corners of the country. Also, they recognize the expediency warranted to revive the economy, whilst at the same time look after the daily “food needs” of the BPL families and look after the “safety net” of workers, marginalized individual entrepreneurs and others at the lower end of the spectrum.