The middle class and direct-impact sectors now require measures to spur demand and boost morale urgently.
Various economic estimates place the fiscal impact of ANBA at 0.8-1.2% of GDP. The government has smartly focused on some long-pending structural reforms and enhancing liquidity. While some sections of the population are yet to receive relief, we must consider that no one knows for sure when the pandemic will end and economic operations will fully return. It is possible the government is conserving resources at its disposal to be ready to invest more later.
ANBA focuses largely on supply-side reforms and relief. MSMEs, a section of manufacturers and employers, agricultural producers, DISCOMS, and other economic suppliers are rightfully beneficiaries.
The demand side needs support too, as an estimated 70% of India’s economic growth since liberalization has been fuelled by internal consumption. With the loss of income and liquidity, crash in demand will impede growth. Apart from increasing liquidity, the government could look at further reducing interest rates to increase borrowing, reducing taxes, and providing more direct income support. Various countries around the world, including the United States and Japan, have deployed a combination of these strategies. The government’s next economic package, hopefully, can focus more on fiscal policies to increase liquidity in the hands of the middle class and taxpayers to drive consumption.
AGRICULTURE: The government has announced large-scale reforms and investment in the sector. Rs 1.4 lakh crores are directed towards strengthening agri-infrastructure, and various investments in micro-food clusters, livestock, medicinal plants, Operation Greens, and others. These investments, as well as liberalizing trade by amending the Essential Commodities Act will go a long way in empowering farmers who now have long-awaited freedom to sell where they want.CONSTRUCTION: One of the largest opportunities for growth and to provide mass employment after the pandemic is in construction and infrastructure projects. ANBA hasn’t addressed this sector yet, which could hopefully form a large part of the next package. The government can enable NHAI, railways and other parastatals to pay off dues to contractors so these large employers have the liquidity to finance the next round of projects. New projects need to be commissioned to sustain jobs.
MANUFACTURING: This sector has seen much relief. Manufacturing MSMEs can now avail the government-guaranteed loans to a total of Rs 3.7 lakh crores. 75% of India’s manufacturing jobs are though SMEs, as per NITI-Aayog data, and this liquidity infusion will greatly help preserve them. Further, the announcement of transformational reforms in coal, mining, defence production, and power can spur local manufacturing. However, these are all capital-intensive industries. The government can consider a major economic package to similarly incentivize labour-intensive industries, especially in the highly-populous heartland states, to absorb excess labour locally. This is especially needed to solve the migrant crisis. Flatted factories can be rapidly built and launched for this purpose.
SERVICES: MSMEs in services sectors can avail loans, but large business operators have not seen much relief. This is especially worrisome because most of the direct-impact sectors from Covid-19 are substantial employers—aviation, hospitality, restaurants, tourism, and others. Without relief from the government, they have had to let go of many employees. A special economic package including a one-year loan repayment deferment is required to tide them over until their operations start up again, which could take six-nine months to get to even 50% of normal operations in light of the pandemic.
POPULATION SECTIONS IMPACT ANALYSIS
FARMERS & RURAL WORKERS: The first tranche of Rs 2,000 per beneficiary via PM-Kisan Yojana was front-loaded to provide minimum income support to farmers during the lockdown. Agriculture operations were shielded and allowed to start up quickly. Many measures were taken to harvest the record-breaking Rabi crop and sow the Kharif on schedule. Farmers can avail loans to the tune of Rs 2 lakh crores via the Kisan Credit Card scheme. DBT for MGNREGA was also issued in record time with an additional allocation of Rs 40,000 crores to provide cover to rural workers.
MIGRANTS: Most states have not treated their migrant populations well, with many washing their hands of and blaming the Centre, resulting in an eye-opening crisis in the country. ANBA has allotted Rs 3,500 crore worth of free food for migrants to be disbursed by state governments. Two large issues remain—one, state governments hardly have any records of how many migrants are in their states, where they immigrated from, etc. Lack of records makes it hard to distribute DBT and food to those in need. A separate department is required to track migrant movement, just like NRI Affairs tracks non-resident Indians. Two, a concerted effort to provide people with jobs in their own states is required to solve the migrant crisis permanently.
SMALL BUSINESSES: The differentiation between different MSMEs who can avail targeted loans, as well as the expanded definition of MSMEs, has helped. With two months of economic lockdown inducing stress, it is suggested these funds be released quickly and banks be directed to lend as per the PM’s directives. The move to clear IT, GST and customs duty refunds is also helpful.
LARGE BUSINESSES: Large business operators have not received much relief. Many of them were hit by the pandemic-lockdown, as discussed under Services above. Corporate revenues have reportedly dropped over 25% during the lockdown and may take more than a year to recover. To retain payroll and maintain liquidity to start operations as the lockdown lifts, large businesses still need relief and urgent tax refunds. RBI can also offer a one-year loan repayment deferment to ensure liquidity.
TAXPAYERS: The 25% reduction in TDS and TCS for non-salaried payments is a welcome move to increase short-term liquidity. While this is applicable on payments for FY’21, it does not address the loss of income due to the lockdown. Tax refunds are being processed into the hands of non-corporates; corporates also need refunds to retain payroll, especially the IT industry. In terms of structural reforms, the long-pending move to a simplified three-slab system with no deductions from the current convoluted seven-slab system will provide more relief and make tax laws simpler.
SALARIED INDIVIDUALS: In a 137-crore population in 2019, only 2.9 crores are salaried income-taxpayers. They have borne India’s high tax-burden for years and deserve support. Sadly, they have not been included in the 25% TDS reduction or fully in the accelerated processing of IT refunds. US and Japan are giving direct cash support in the accounts of honest and compliant taxpayers to spur spending in a recessionary environment. India also needs to take care of salaried taxpayers.
INVESTORS: Investors, overwhelmingly middle-class, have been devastated by the dramatic decline of Rs 45 lakh crores in the stock market since the beginning of March. An estimated 3 crore investors, through 9 crore folios, have been impacted. SIP investors are critical for domestic wealth creation—they had invested Rs 1 lakh crore in FY’20 and were a counter to the FIIs. The best way to support wealth creators is to abolish long-term capital gains tax for individuals. In AY’19, out of Rs 45.3 lakh crore total income declared, LTCG by individuals was only Rs 67,000 crores. At best, LTCG yielded Rs 13,000 crores tax out of a total Rs 8.9 lakh crores collected—barely 1.5%. Abolishing individual LTCG tax will hardly impact government tax collections but will have a tremendous feedforward wealth effect to drive spending.
STARTUPS: Hardly any relief has reached startups. GoI can capitalize SIDBI in order to fund AIFs to disburse money to startups. Removing the LTCG tax can also help startups access capital from Indian investors. Reforms to incentivize insurance companies and other Indian institutional investors to pool money into Fund-of-Funds and direct investments are the need of the hour to keep India’s once-shining startup ecosystem afloat while the pandemic-lockdown goes through.
The PM’s ANBA program is visionary and will have a substantial impact. The Indian government has boldly prioritised lives first and has now focused on reforms to strengthen national economic security. The middle class and direct-impact sectors now require measures to spur demand and boost morale urgently.
T.V. Mohandas Pai is Chairman, Aarin Capital Partners, and Nisha Holla is Technology Fellow, C-CAMP.