The Covid-19 pandemic is a serious threat to many lives and livelihoods in India. Sensing the gravity of the situation, Prime Minister Narendra Modi announced a three-week lockdown for the entire country on Tuesday till April 14. On Thursday, finance minister Nirmala Sitharaman announced a ₹1.7 lakh crore Covid-19 mitigation economic relief package under the PM Garib Kalyan Yojana (PMGKY).
For the next three months, the package offers the following: additional 15 kg grain (rice or wheat) and 3 kg of dal free to 80 crore poor Indians; ex gratia ₹1,500 (₹500 over the next three months) to 20 crore Jan Dhan account-holding women; free liquefied petroleum gas (LPG) to 8.64 crore Ujjwala beneficiaries; addition support of an extra one-time ₹1,000 to the three crore senior citizens, widows and divyangs (differently abled). Besides, the five crore families of MGNREGA workers will received increased wage support of up to ₹2,000.
The government will expedite payment of the first instalment (₹2,000) due in 2020-21 in April itself under the Pradhan Mantri Kisan Samman Nidhi (PM-KISAN). For the organised sector worker, GoI will pay the Employees’ Provident Fund (EPF) contributions of both sides for 80 lakh employees of small companies who earn up to ₹15,000 a month.
The package will surely help the 800 million poor — landless workers, small and marginal farmers in rural areas, the aged, poor women and construction workers — to mitigate the hardship caused by the Covid-19 lockdown.
However, it can be recalibrated for better effect. For instance, five crore families of MGNREGA workers with proper identification are unquestionably poor, as are the families of 3.5 crore construction workers. To boost their demand and income, these families should be paid a part of their entitlement without requiring them to work. (Under present circumstances, working outdoors is to be avoided anyway.)
The package is also not enough to address the economic crisis. It has left the market unimpressed. Even though GoI is absolutely right to call for a lockdown, the strategy has its own costs. Activities of major employers — in the hospitality and tourism, catering, entertainment, retail, construction and real estate sectors — have come to a grinding halt, leading to heavy job losses.
In other sectors, micro, small and medium enterprises (MSMEs) are struggling to pay their bills and service their debt. In fact, even big companies are looking at cash shortage, overstretched balance sheets, lower capital expenditure and no demand. The timing is especially bad, as the growth rate was already low and unemployment the highest in decades. Some very hard choices lie ahead for the finance minister-led economic response taskforce.
It is paramount to protect people from becoming unemployed, or from suffering an income shock that could lead to unemployment. Due to multiple reports of administrative inefficiencies and manipulations by hoarders, supplies of food and other essentials are in short supply, and their prices too high. For the poor to benefit from PMGKY transfers, it is crucial to address these issues.
GoI should invest in healthcare to augment capacity for diagnostic tests & intensive care, as well as preventive tools to suppress the virus. This is the most important investment today.
Moreover, the government and Reserve Bank of India (RBI) should work closely to bring financial stability and mitigate the crisis. The waivers and relaxations in deadlines under the tax and company laws announced by Sitharaman on March 24 are welcome. The raise in the threshold from ₹1 lakh to ₹1 crore for triggering insolvency proceedings under the Insolvency and Bankruptcy Code (IBC) will help MSMEs. However, the crippling effects of the pandemic are pervasive. More needs to be done.
Companies are having to deal with high cost of capital due to cancelled orders and unsold inventories. While the working capital cycles of companies have got longer, the private debt market has frozen. There are hardly any takers even for AAA-rated bonds. Clearly, the liquidity is not flowing to where it is needed, even though the system has enough of it. The worried market is causing cash-hoarding.
It will not be a good idea for RBI to purchase corporate bonds. However, a rate cut and big open-market operations will help, and ensure that the situation doesn’t worsen. A special liquidity window for mid-tier banks will also help to provide much-needed backup liquidity.
Unlike developed countries, India does not have automatic economic stabilisers such as universal health coverage and unemployment insurance. Therefore, it is important to ensure that no company, small or big, faces the risk of closure or bankruptcy because of the Covid-19 lockdown.
Finally, GoI should be willing to relax the fiscal deficit targets to 6%. RBI can buy government bonds to keep the yields low and market orderly, just like it has managed the forex markets. With crude at $25 a barrel and good rabi crops, inflation is not an immediate concern. In fact, excise duty on petroleum products should be used to generate funds.
This approach to the crisis, of course, has its drawbacks. Public and corporate debt will soar. Some of the benefits may go to undeserving firms and individuals. However, risking a recession will cost more.
The writer is professor, Delhi School of Economics