Middle India and taxpayersneed moreeconomicsupport from the government
In the time of the Covid-19 crisis, the Indian government has boldly prioritised the lives of Indian citizens by maximising social-distancing and shelter-in-place via a complete lockdown. PM Narendra Modi’s strategy seems to be working—India’s pandemic curve is flattening barring some hotspots, and the lockdown is extended to May 3. However, the government and administration mustacknowledge that this is not a situation where you choose between national health security and national economic security. The country cannot compromise or delay on securing either—this must be approached as a war-time scenario and urgent response is needed.
The Indian economy has ground to a complete halt due to the lockdown, threatening the livelihood of crores of people. SBI’s Economic Research division predicts a total income loss of Rs 4.05 lakh crore through the lockdownfor the 37.3 crore workers estimated by PLFS as self-employed, regular and casual workers. These citizens will not all have the ability to last through the very obvious economic slowdown without intervention.
While the Rs 1.7 lakh crore package offers much-needed relief to the bottom-of-the-pyramid, Middle India and taxpayers havenot been addressed. PM Modi has infused hope in the hearts of these citizens by asking employers to hold on to jobs and make payroll in these difficult times, and employers are doing their best despite lack of liquidity and resources.
Several high-ranking government officials have asked these citizens to be patient as they design relief measures. With three weeks of lockdown already past and a 19-day extension announced, the administration cannot delay further. This is not the time to maintain a 3.5% fiscal deficit or cobble together a relief package for Middle India from the refuse of other priorities. In these extraordinary times of need, it is important to stretchall resources at hand to offer urgent relief to save lives and livelihood, and give hope to job creators.
With the global world order in flux and India in a relatively better position vis-à-vis the pandemic, the administration can actually afford to be aggressive and secure long-term global funding to drive India’s growth and employment for the next decade. This winning dynamic is ours to lose in the absence of strong action from the government.
The stakes for India have never been higher. We are at a GDP of Rs205 lakh crore and a top-five world economy now. We have performed better than most expected and much to the surprise of the Anglo-Saxon first world. The IMF projects that India is the only top-5 economy that may register positive growth in FY 2021. The Indian administration must focus on protecting jobs and job creators to keep the economy intact and to have a chance at a coordinated recovery.
Jobs from Covid-impact have been in jeopardy for more than a month now. The south went into lockdown ahead of the rest of the country and jobs have been in flux for 45+ days in southern citieslike Bengaluru. On an all-India basis, the lockdown is officially running from 25 March to 3 May, a long time for economicsuspension.The biggest challenge for India post-lockdown is protecting current jobs and generating new employmentpost-lockdown.
- Agriculture: 43% of the workforce is in agriculture which is being ramped up to harvest the Rabicrop cycle. This sector is less affected by Covid-19 and with the right policies and workforce deployment, could register minimal losses. Agriculture already receives Rs 70,000 crore through the PM-KSNY along with Rs 61,500 crorefor rural workers via the MGNREGA scheme. The Government of India is fully committed to provide for rural jobs, as can be seen in the Rs 1.7 lakh crore relief package that is focused largely on this sector.
- Industry: 24% of the workforce is in industry and manufacturing. These sectors are devastated and may register negative growth in FY’21. Unemployment could be the highest in this sector, if the government doesn’t provide relief to job creators and MSMEs in industry. An equally systematic relief program must be constructed for industrial jobs.
- Services: 33% of the workforce depends on services that may plummet to 2.5-3% from 7.5% growth. Many high-employment COVID-impact sectors like airlines, airports, entertainment, hospitality, restaurants, tourism, and others form a part of services. It will be devastating for income earners in this segment if relief does not arrive to protect jobs here promptly.
The Rs 1.7 lakh crore relief package does not majorly address either the industry or services sectors. RBI has come out with various measures for money market liquidity, which are not translating to an increase in credit or working capital to job creators in these sectors; with the exception of some measures taken by SBI and other PSUs.
JOBS AT RISK IN INDUSTRY/SERVICES
In the absence of economic relief, adequate increase in working capital, or firm measures to protect jobs in industry and services, many formal and informal jobs are at risk. This sector is fast losing hope, despite wanting to uphold the PM’s request to retain employees.
- Formal employment: About 8 crore people are formally employed, as detailed in the EPFO and ESI databases. Of this, about 4-4.5 crore are contract labour and their jobs are in jeopardy. Data indicates a majority have been paid wages in March but the April payroll is a matter of worry because people are unsure of when the economy will open, how staggered is the opening, and whether they will receive any relief to retain payroll.
- EPFObeneficiaries: The FM has already announced that the government will contribute both the employee and employer contribution over the next three months for some EPFO beneficiaries, but this comes with restrictions on wages (Rs 15,000 ceiling) and the number of employees in the company (up to 100) – leaving many other companies in a crunch. This must be extended to cover all MSMEs – at asalary level of Rs 30,000 and up to 1000 people as this will ease the stress on larger job creators and employees who have been working for 10-15 years and earning more; otherwise, they may be laid off in these distressing times. It is hard to believe that the administration is unwilling to protect employees simply because they earn higher wages due to their specialisation or experience, or work in larger companies. Their livelihoods are also important. The administration must do away with arbitrary restrictions on who receives relief.
- ESI/Other: The administration must also consider finding a way to directly help ESI beneficiaries. Further, the EPFO only includes companies with 20-plus employees in 190 industry classifications while the ESI includes companies with 10-plus employees in 90 industry classifications. There are many smaller entities that do not fit this bill but aggregately employ crores of contract labour and cannot make payroll. With the amount of data available with GoI in the EPFO/ESI/GST and other databases, similar measures to identify and provide smaller companies with relief must be considered urgently. The ability for these smaller firms to recover from this economic shock is more impaired and the case for relief in this segment cannot be ignored.
India’s foremost national goalon the economic front currentlyis to protect jobs. Many issues concern employers and require urgent redressal from the government:
- Lack of liquidity and working capital– Most people in industry and services sectors want to stand by the PM’s request to not lay off jobs and cut salaries. To do this, they need liquidity and money. The administration must increase working capital for which a large Credit Guarantee Fund of at least Rs 50,000 crore needs to be set up to assure at least 10% first losses to buttress bank lending to the employers. Some bank chairmen have publicly announced that banks are hesitant to lend because of the high uncertainty and in the absence of a credit guarantee from the only entity large enough in the country to bear it – the government. Increasing working capital through bank lending will help maintain payroll and give hope to these sectors that when the lockdown is lifted, they will be able to start operations again. RBI says about Rs 6.3 lakh crore is parked with it by banks showing clearly that they are not lending to MSMEs who are starved for liquidity.
- Why is liquidity the issue, and not solvency? – With the economic lockdown, companies in these sectors are unable to collect receivables and to complete payables. The system is jammed, preventing inflow of working capital required to maintain payroll. The government must understand that most of these companies have adequate assets and are not in danger of insolvency, but in these times of frozen capital flow, they need help with liquidity to make payroll. If it comes down to the survival of the company to make it to the end of lockdown, they will be forced to lay off labour and preserve whatever cash they have to open up after lockdown. By not providing relief, the government will force these companies to lay off labour, affecting the economy deeply and going against the sincere intent of PM Modi.
- Direct support – We have already discussed increased measures for EPFO/ESI beneficiaries above. The government can also consider transferring a direct credit of Rs 3000 per month for three months to the accounts of 4-4.5 crore people which they can withdraw instead of wiping out their savings – this will amount to Rs 36,000-40,000 crore. It is important to give these people and their employers hope and support in these trying times.
- Direct-impact sector relief – Special relief for direct-impact sectors is necessary since they are laying off employees because revenues have come to zero due to the lockdown. A one-year deferment of EMI instalments, term-loan, interest payments and other measures to improve their working capital is important to maintaining whatever jobs are left in these sectors. Otherwise, not only will post-Covid unemployment be high, these sectors will find it hard to start up again after the pandemic subsides if they are not ready with payroll and capacity to re-employ.
- Blue-collar labour – India’s biggest startup for blue-collar workforce management that processes 70-plus lakh worker profiles, gives some indication about job loss in this area. Its records indicate that out of 5 lakh people in the facilities and security sectors, more than 80% are not marking attendance. It is not known if they are being paid regularly or asked to leave. A majority may be kept on the roster, but for how long is the question, given the uncertainty. Blue-collar labour is a very large sector, mainly on contract so theywill be promptly laid off if there is no relief.
- Cab drivers – Additionally, many companies that employ drivers for cabs are reporting zero utilisation and are unsure about making April payroll. Reports say that banks are looking at Rs 30,000 crore-plus in defaults of loans given to cab drivers who have returned to their villages in the absence of employment.
- Real estate, road transport and construction sectors – After agriculture, the highest number of unskilled or low-skilled workers are employed in these sectors. With suspended operations here, unemployment is very high. The devastation to these segments due to the lockdown will have long-standing negative impact on employment and productivity. Without relief, this will drag down any chances of revival for the economy.
Even after the lockdown ends, workers in these sectors listed above may not be immediately employed as before because their employers have to slowly ramp up operations in a highly-uncertain, post-Covid economy. These workers and employers need support from the government as they ramp up to 50-60% of the operation over 3-6 months.
JOB CREATORS AND TAXPAYERS NEED RELIEF
For the purposes of understanding the economic effects of the extended lockdown and absence of strong relief measures, Indian civic structure can be broken down into three sections:
- Bottom-of-the-pyramid: The first relief package of Rs 1.7 lakh crore announced by FM Nirmala Sitharaman on 27 March 2020 provides relief to India’s most vulnerable citizens, those without staying power to sustain themselves through the lockdown. These include construction workers, rural labourers, agricultural workers and farmers, BPL families, senior citizens, and women Jan Dhan (JD) account holders. It includes Direct Benefit Transfer (DBT) of which the first set were transferred in record time thanks to the DBT-JD account infrastructure set up during NDA-I by PM Modi. The government has considered many facets of the lives of Indian citizen by including free gas connections for Ujjwala Yojana beneficiaries and food for 80 crore people under the PM Gareeb Kalyan Anna Yojana. This is a very good step and helps 80 crore people – 58.4% of India’s population.
- Other20%: The other20% of the country has the wherewithal to survive the lockdown with strong government employment links or their savings. These include:
- Government employees and pensioners: The Central and State governments, parastatals, and bureaucracy together employ approximately 2.5 crore people. At a typical family of 4, this amounts to 10 crore citizens. Further, 2 crore people receive government pensions – supporting on average one more person, this amounts to 4 crore citizens. A total of 14 crore citizens are part of this services sub-sector. Most economists state that only this sub-sector will remain unhurt by the economic lockdown since they are guaranteed salaries and pensions via tax collection.
- Other taxpayers: The balance 9.8% in the Other 20% constitute promoters of companies, successful entrepreneurs, senior management and white-collared employees of industry, banks, etc. and their families. They either have adequate savings or secure jobs or both. They don’t need relief from the government for personal benefit. However, urgent relief measures infusing liquidity into the economy will enable them to retain more employees on the payroll and retain their jobs as employees.There may be a perception that this is the lowest priority for any government in such a situation. However, history is clear that any economy that does not protect its employers and tax payers during a crisis will struggle to recover when it needs them to contribute to growth and revival. These are compliant, honest, tax-paying citizens and the administration must not abandon them at this time of crisis.
- Middle India: Middle India, including the salaried class and job creators via MSMEs and businesses, roughly 21.4% of the population, has not been adequately addressed. They haven’t received any substantial help from the government and most only have 1-2 months spending power to sustain their business. With the lockdown extension and absence of any relief so far, they will burn into their savings and be hurt deeply. The lockdown is being felt most acutely by this section as they shoulder the total shutdown of India’s economy. They will be most susceptible to economic attack by cheap goods imported in to replace their capacity as certain economies recover faster than ours. For India’s national economic security, the administration must not forget to prioritise this segment.
The feedforward damage of not providing relief for Middle India and taxpayers will cripple the economy and leave India exposed to unacceptable declines in its resiliency.
INDIA HAS A MINUSCULE TAXPAYER BASE WHICH ALSO NEEDS SUPPORT AND HOPE
- Indian income taxpayers: The CBDT targets to collect Rs 5.6 lakh crore in income taxes in FY’20, amounting to 2.73% of GDP. India bears one of the highest tax burdens in the world paid by a narrow section of people. In India, out of a population of 137 crore people in FY’19:
- 5 crore file tax returns – 4% of population
- 3 crore pay taxes – 2.4% of population, which means 24 in every 1000 people pay any income tax at all
- 2 lakh people pay 60% of taxes – less than 0.1% of the population
3.3 crore people with a typical family of 4 amount to 13.2 crore people. This honest and compliant taxpaying base also needs hope and support from the government. They shoulder a very high burden of taxes, and constitute decision-makers who will make investment decisions in the future that can help realign the Indian economy quickly to a high-growth trajectory. Their morale should not be damaged due to being ignored by the administration in times of crisis.
Contrast this with other major economies where the number of taxpayers per 1000 population is 400-600, whereas in India it is only 24. And many of these people are hit by the lockdown with no relief measures, which means their capacity to pay income tax is diminishing by the day in the lockdown. The G20 countries have scrambled to protect their tax payers and small businesses first – the Indian administration cannot compromise this segment by not reciprocating similarly.
- IT/GST Refunds: A welcome move by the Finance Minister has been to issue pending income tax/GST refunds. The CBDT announced a first wave of refunds to 14 lakh small taxpayers estimated at Rs 18,000 crore, of which Rs. 10.2 lakh refunds totalling Rs 4,250 crore isreportedly processed. However, the celling of Rs 5 lakhsfor refund must be removed since this is the citizens’ own money and must not be held back by the government, especially in times of crisis.
- GST Filers: While indirect GST is paid by anyone who consumes goods, direct GST is paid by the many small businesses around India. Of the registered 1.2 crore filers, around 80 lakh file regular returns. Further, of the 5.5 crore IT returns filed, 2.14 crore are under the heading “business”. This is a very large and productive sector of the economy. These people have built their own businesses and generate vital employment. If the government does not address this sector, they will be forced to let go of employees. The wave of shutdowns in this segment will cripple any plans for recovery post-lockdown.
Many direct GST filers have GST refunds due. It is incumbent upon the administration to process those refunds immediately and give people their own money back urgently so they have liquidity. This will enable them to keep employees on payroll for longer.
- Small and Medium Enterprises (SMEs) – There are approximately 42.5 million registered and unregistered firms that are the biggest job creators in India. NITI Aayog data shows 90% of manufacturing jobs in India are in SMEs. A relief package that provides them with working capital is necessary to maintain payroll.
There has been inadequate response on relief for job creators, MSMEs, and taxpayers from GoI and FinMin. While RBI has increased liquidity with banks, money is not flowing to the MSME sector. This needs policy interventions. This lack of need addressal willdecimate job creators and taxpayers by depriving them of any relief during a complete economic lockdown.
The bureaucrats and decision-makers have to be sensitive to the needs of employers and job creators. There is a growing perception throughout the country that the bureaucrats at the centre of economic decision-making arenot focused on relief for job creators or Middle India. There is a need to for these bureaucrats to step into the shoes of Middle India, understand how stressed their finances are due to the lockdown, and how important it is to give them relief. People are willing to take the pain and respond to PM Modi’s appeal to hold on to payroll, provided they are assured by urgent policy action and retain belief in the system.
Any delay in substantial relief to tax payers, job creators, and MSMEs will be perceived as a complete failure of reciprocation from the administration. An overwhelming majority of these segments are compliant and honest citizens who have followed the directives of the system for decades. Perhaps more crucial than anything else, Middle India is losing hope that the government will secure their economic interests. If there is no urgent relief now, we will break the spine of our country and cause irreparable damage to the collective consciousness of our people.
Further, as the economy comes out of lockdown, the government must immediately look at generating jobs for millions of workers. If job creators are irreparably hurt, this burden will fall solely onthe Government and it will be impossible to bear. If immediate focus is not applied here, the bottom-of-the-pyramid 80 crore people will not be able to access employment post-lockdown and will be forced to continue to rely on government benefits and subsidies for at least 2-3 years. The Modi government has done a lot for the poorsince 2014, and focused attention during NDA-II to shift workers from agriculture to manufacturing and construction will further accelerate mass employment.
In the event the government doesn’t have the resources, it can dip into RBI’s reserves. The RBI’s balance sheet of 30June 2019 makes for interesting reading. It has $400 billion of forex reserves valued at Rs 27.6 lakh crores plusgold of 618 tonnes valued at $24.3 billion converting to Rs 1.67 lakh crore (90% of market value). The forex reserves are marked to market at Rs 68.9. The cost is estimated around Rs 56. The unrealized gain of around Rs 5.07 lakh crore are held in the currency + gold revaluation account of Rs 6.64 lakh crore.
The RBI is fully owned by the Government via an Act of Parliament. GoI can ask RBI to transfer, say, Rs 3 lakh crore of the unrealized gain of its forex to the government account by increasing the carrying cost to say Rs 63.50. With the reserves increasing to $439 billion today and the rupee valued at Rs 76 to a dollar, it is very probable that the unrealised gains are much higher than as of 30 June 2019.
This Rs 3 lakh crore can be transferred as non-tax revenue to the government budget, in addition to the regular dividend of Rs 1 lakh crore this year. Obviously, this has to be monetized by the RBI when it enables the government to use this credit. This is better than borrowing in the bond market which has limited resources or borrowing overseas at this time.
This Rs 3 lakh crore can be used to give relief as detailed below:
- Credit guarantee fund with backstop for first losses at 10% guaranteeing Rs 5 lakh working capital to MSMEs – Rs. 50,000 crore
- Refunds of IT, GST and 14% guaranteed GST collection to states – Rs 1 lakh crore
- Payments to NHAI contractors/railway contractors/health sector/other goods and services availed by government but not paid – Rs 1 lakh crore
- Advance to NHAI and railways to start infrastructure works by making advance payments – Rs 50,000 crore
Every country in the world is scrambling to secure its national economic interests in this pandemic-struck reality. The Indian administration must not abandon its honest taxpaying, job-creating citizen minority as it addresses other priorities. This Rs 3 lakh crore from RBI reserves will enable the Indian economy to sustain itself, restart growth, keep existing employment going and give hope to the Indian people.
PM Modi has brought the country together through his direct national addresses. His multiple requests for the country to come together to applaud people on the frontline have led to the largest coming-together of Indians in the times of Independent India. After the lockdown extension, hope can be kept alive by the announcement of an aggressive economic relief package – financed by Rs 3 lakh crore from RBI reserves- that supports Middle India’s frantic effort to hold onto jobs; the absence of which will adversely affect the bottom-of-the-pyramid’s ability to find employment post-lockdown. This is “sabkasaath” in action and there must be no citizen left behind.
T.V. Mohandas Pai is Chairman, Aarin Capital Partners and Nisha Holla is Technology Fellow, C-CAMP