The central bank continuing to supply large amounts of liquidity to prevent credit markets from freezing and advancing its bond-purchase plan is a welcome move; and earlier, in order to calm the forex markets, it had done $4bn in dollar swaps. A rate cut, most agree is called for, but at the same time, it is also clear this will do little in isolation. Indeed, with the economy quickly coming to a halt, especially with most parts of the country heading for a lockdown – and possibly even a curfew – it is clear the situation is unlike even the 2008 crisis that most compare it with since, this time around, it is not just the financial sector which is compromised. In all likelihood, at least two quarters of growth will be hit; automobile firms have announced shutdowns, airlines have been instructed to stop domestic operations, etc. That, of course, is also why most hoped that the prime minister would have at least outlined some of the major moves when he addressed the nation last week to prepare it for a lockdown; a deadline like a prime ministerial addresses helps finalize the plan faster than otherwise.
There are, as experts have pointed out, real dangers with opening the spigots too much since, with very high levels of the real fiscal deficit, this will lead to a rise in bond yields which will defeat the purpose of the exercise. At the same time, there is little doubt millions of poor and lower middle-class people desperately need money to compensate for job losses; a direct cash transfer, possibly on a weekly basis, to them immediately is called for and it helps that thanks to the ration-shop DBT and the JanDhan accounts, the government already has their details and can transfer money quite quickly. Over the year, and this is critical, the government just has to balance part of the increased expenditure now by cutting wasteful expenditure. A favourite example of this newspaper is that of food subsidies given via FCI and the country’s ration shops. Giving cash subsidies for 5 kg of wheat and rice per family per month instead of physical rations, for instance, can help the government save Rs 50,000 crore per year; not only is FCI’s procurement system very costly, massive over-procurement at the MSP also adds to its costs in a big way. The extra stock FCI is carrying can also be sold to defray a large part of the corona-package.
The government and RBI also need to act quickly on whether forbearance of one to two quarters should be given for all loans or just those to MSMEs which are probably the worst-hit; certainly asking the airlines to shut operations will ensure that they will be unable to service debt for a while and the slow speed with which the telecom package is being finalized will make sure banks have huge stresses there as well. While the government needs to move on all these fronts quickly since the economy is tanking alarmingly fast, why not to begin with start with all government bodies paying their dues to industry on time? State electricity boards owe private generators close to Rs 1 lakh crore and while the power minister has been talking of a solution to this for a long time, nothing has been finalized. NHAI owes contractors amounts running into tens of thousands of crore and tax refunds that are due are estimated to be in the region of Rs 80,000 crore or more. Even without a corona-package – which is sorely needed – the government can do a lot by simply giving people back what is legitimately theirs.