We must take stock of the economic losses in different sectors and announce a stimulus package that will help citizens in dire straits as well as industries directly impacted by the virus.
The coronavirus pandemic has created panic in countries all over the world. Whole cities are under lockdown to arrest the spread of the virus. Social distancing—vital to the slowdown of the pandemic—also means people will stay at home, and not interact at offices, shops, factories, and elsewhere. As a result, economic activity is almost at a standstill and is creating considerable disruption; expected to continue for some time as nobody can predict when normalcy may return. Economic growth globally for this calendar year may be zero or even negative. Around US$27 trillion of the market value of stocks have been wiped out in the financial markets.
The most significant impact will be on employment as tens of lakhs of people will be laid off due to the massive decline in economic activity. A substantial number of people globally are self-employed or are in small businesses which depend on daily cash flows—now shut off. The United States is already experiencing a massive increase in unemployment claims.
Many countries are mobilizing economic stimulus packages to ensure their citizens have enough cash to survive until the pandemic is under control and normalcy returns. The United States Government is working on a US$ 2 trillion package which includes sending money directly to citizens’ accounts, deferment of taxes, and bailing out direct-impact industries like airlines, airports, restaurants, hospitality chains, and others. Similarly, Canada announced a US$82 billion package, including a weekly payment to people in need. The UK too announced a GBP 350 billion package including tax holidays for impact industries and businesses, and offering to pay 80% of wages up to GBP 2,500 per month for impacted people.
India must follow suit immediately. Out of the 52.5 crore people in the workforce, around 22.6 crore are in agriculture and the balance in industry and services. Of this nearly 30 crore, about 11 crore are on the payroll of either private players or Government as evidenced by EPFO/ESI monthly job reports. Of these 11 crore, around five crore are on contract labour and can be easily laid off by cancellation of the contract as is happening right now. The balance is in informal sectors, MSMEs or are individual wage earners who may see a dramatic decline in daily incomes.
This follows that a minimum of 10 crore in the workforce may be directly impacted by the decline in economic activity with shutdown or lockdown of cities, stoppage of transportation, and reduction in supply chain activities for weeks at end. Those who depend on daily cash flow will be suddenly bereft of cash for livelihood. India is facing an unprecedented situation, more severe than any in recent history and with no light at the end of the tunnel.
We must take stock of the economic losses in different sectors and announce a stimulus package that will help citizens in dire straits as well as industries directly impacted by the virus. The package can be put together using data, which can consider the following:
AGRICULTURE: Around 43% of India’s workforce depends on the agriculture sector, which contributes about 17.6% to national GDP. At the moment, we have the rabi crop cycle ongoing at an estimated record high, which starts entering the market in a week or so. We must fortify the supply chain for receiving the stock in the markets and mandis, ensure Government agencies make timely procurement payments, and maintain minimum procurement prices. Ensuring minimal disruption to this massively beneficial economic activity over the next three months will be essential to stabilizing the livelihood of such a large workforce in states across India.
Rural areas dependent on agriculture have been primarily isolated from the pandemic because of scattered human activity, almost no international travel, and possibly the lack of data or knowledge about the virus. Uttar Pradesh and Karnataka have already announced they will supplement the Rs 6,000 per year that the Central Government pays farmers under the Prime Minister’s Kisan Samman Nidhi scheme. If all the state Governments join together to increase the Rs 6,000 to at least Rs 10,000 a year, this will go a long way in helping the nine crore farmer families.
INDUSTRY: Around 25% of the workforce depends on the industry sector, which contributes about 27.4% to national GDP. The sector might see near-zero growth in FY 2019-20 and FY 2020-21 as industrial production is negative in many areas. While labour shedding has occurred, not many jobs have been lost as yet. With an imminent three-month lockdown, large scale job loss is likely. PM Modi has appealed to desist laying off workers; some fiscal measures must be adopted to make this possible.
Of about 13.1 crore people in industry, half might be in informal sectors or MSMEs. In the organized sector, 25-40% of people in contract labour or small-scale supply may lose jobs. The construction industry is in deep trouble. It employs the largest number of workers after agriculture. It depends significantly on Government spending on infrastructure, investment from the private sector, and housing and commercial real estate activities by real estate operators; these activities are now at a near standstill impacting 50-60% of direct employment.
There is an urgent need to bail out the industry sector through direct benefit transfer (DBT) to workers through the information available with PF and ESI authorities, as well as measures to ensure adequate liquidity with the MSMEs and others.
This is not yet a solvency issue, but one of liquidity at a time when business revenues might fall to zero. It is remarkable to note the announcement of State Bank of India led by its dynamic chairman, Rajnish Kumar, on providing loans up to Rs 200 crore to clients with good accounts with a moratorium of six months at 7.25% interest. All banks must mobilize such schemes to increase the working capital of MSMEs and others that face liquidity challenges.
RBI has so far been a bystander; making sympathetic noises but not taking the lead in providing assistance. RBI must work with banks for deferment of payment of all loans, including EMI on consumer loans for the next six months without classifying them as NPA based on the individual banks’ discretion. A moratorium on payment of loan instalments for all MSMEs, too, will go a long way in keeping these businesses afloat in troubling times.
SERVICES: The sector employs 32% of the workforce while contributing 55% of national GDP. This is where the effect of the pandemic has been most devastating. Thankfully, a fair component here work in Government and parastatals and will continue receiving salaries from the Government’s tax revenues.
The other services sub-sectors are reeling. Trade faces 25-30% decline, as does retail; tourism about 70-80% and travel, hospitality and restaurants about 80-90%. The entertainment and events sectors have crashed; Bollywood is in deep trouble. The livelihood of 5 crore people may be in jeopardy here. In the professional sector, professionals will be able to sustain for the next three-four months provided their EMIs are deferred for some time. The formal sectors like IT, banking and others are mostly in the hands of larger companies who have the cash but may require some support to survive.
The airline industry must be allowed to defer all taxes for three-six months, and avail reduced prices for aviation turbine fuel weekly for about four weeks till they can access the low prices in the global market. Deferment of all loan instalments as well as a bailout with working capital on the condition that they do not lay off anybody will help them. The Government must talk to the associations in the hospitality, hotel, travel, entertainment and other troubled industries to work out similar packages there too. There are also a large number of individual shops and small informal businesses in the services sector that need help.
With this overall economic view, India needs a bailout package of around Rs 5.4 lakh crore to be maintained by the Government to spend over a period:
- DBT for about 15 crore families including farmers, unskilled labour, construction labour, informal sector, MSMEs and so on. At Rs 2,000 per month per family for six months, that amounts to Rs 1.8 lakh crore.
- Postponement of taxes of many sectors like hospitality, aviation, and so on amounting to roughly Rs 50,000 crore over the next six months
- Bailout of direct-impact industries like airlines which could total to Rs 10,000 crore over six months
- Liquidity: Asking banks to defer all EMI and loan instalments for six months at the discretion of the banks for people who do not have the necessary liquidity. The RBI can issue a directive that deferment for six months will not be considered as NPA, and banks do not have to provide for it. RBI has ensured liquidity in money markets by open market operations. Money markets have cash, but banks are not lending. It is essential for RBI, the banks and Government to come together and state that at all banks will give 20% increase in working capital to firms and 20% increase in personal loans up to a particular limit to people in need on the condition that they start paying back after six months. There could be some loan losses for some time for which the Government could give them a backstop at 10% on a first loss basis. These measures could approximate to Rs 50,000 crore of the total.
- IT and GST refunds already due to people and companies must be processed immediately so people can access increased liquidity of their own. Similarly, the Rs 30,000 crore shortfall due to states per the guaranteed 14% GST returns can be processed to provide states with cash to offer stimulus packages to citizens. These were refunds due to people and entities which the Government had held back due to the liquidity crisis earlier in the FY and must be processed quickly in light of the new crisis. This totally could be Rs 1 lakh crore.
- Medical testing: About 60% of the population do not have the means to spend Rs 2,000-5,000 on testing for the virus. However, it is essential to test anyone that exhibits symptoms, and the Government has to bear the costs. Even if we test 1 crore people over the next three months—a near-impossible task—costs of about Rs 5,000 crore need to be set aside for this.
- Hospitalization: If 2 lakh people are hospitalized for two months, it could cost the Government Rs 25,000 each to keep them under medical care amounting to Rs 500 crore. Taking the much larger target population into account, a suggested Rs 20,000 crore must be kept apart for this purpose to take care of all health spending.
- Long term crisis management: At this time of crisis, Government must also take a long-term view to ensure that medical health is available in all states and districts. India has around 718 districts across the country with above par medical care in roughly 218 (in urban areas or the more developed areas of the South). In the balance 500 districts, it is suggested that Government build 500-bed hospitals in every district as part of this program to insulate the Indian population against future shock. At the rate of about Rs 50 lakh per bed for 2.5 lakh beds, this could cost Rs 1.25 lakh crore over the next three years. This move is essential because everyone must be able to avail medical health in their district instead of travelling far. This will go a long way in enabling India to build health infrastructure for the next generation requirements.
Of this Rs 5.4 lakh crore, states can share a 20% burden, with the Centre raising the remaining 80% through various means.
A snapshot of India’s Rs 5.4 lakh crore economic stimulus package looks like this:
- DBT for 15 crore families at Rs 12,000 each Rs 2,000 p.m. = Rs 1.8 lakh crore
- Postponement of taxes = Rs 50,000 crore
- Bailout = Rs 10,000 crore
- Backstop for first losses for bank lending = Rs 50,000 crore
- IT/GST/State GST refunds = Rs 1 lakh crore
- Health spending on testing and hospitalization = Rs 25,000 crore
- Long term spending on health capacity = Rs 1.25 lakh crore
GoI must not hesitate to come up with an extensive package to restore the confidence of its 137 crore-strong population. It will send a clear signal that the Government is committed to the livelihood and safety of its citizens.
To raise the resources, it is suggested that the Government can float 20/30-year bonds at about 6.5% from the market for this purpose for a period of time. A part of the current budget spending of Government can also be repurposed. This borrowing should be outside the fiscal deficit and shown separately as a line item for a special exercise to meet the virus crisis. These bonds can be called the Karuna bonds, showing compassion in the time of coronavirus. The Government can also approach the World Bank and/or the Asian Development Bank to avail a line of credit to the tune of US$10 billion or Rs 75,000 crore or tap overseas financial markets like Tokyo with significant surplus funds.
India does not lack the financial capital to make this happen but needs broad vision and firm resolve to execute. This special recourse is only 2.5% of overall GDP. It may seem large but is within the ambit of what other countries are also preparing. Comparatively, the US is looking at spending US$1 trillion for this purpose, which is 2% of GDP and may even go as high as US$4 trillion. The UK is planning a fiscal package of GBP 350 billion while its GDP is GBP 2.21 trillion—amounting to 15% of GDP! India must not hesitate at this crucial juncture.
Indian citizens are in an existential crisis; both their health and livelihood are in flux. Central and State Governments must work together in these extraordinary circumstances to raise the necessary capital and put together an effective delivery mechanism to help the vulnerable 60% of India’s population. Kerala has worked out a Rs 20,000 crore package to meet state requirements, despite not having any visible resources. The UP Government has announced a large-scale package to take care of daily wage earners and construction labour. All states must work this out and announce packages where 20% can be funded by the state and the balance 80% by the Centre. We live in perilous times, and citizens all over India look to the steady hand of Government help to tide them over in this crisis.
T.V. Mohandas Pai is Chairman, Aarin Capital Partners, and Nisha Holla is Technology Fellow, C-CAMP.