Clipped from: https://economictimes.indiatimes.com
Lockdown has largely impacted urban India. Rural India, especially agriculture, is in reasonable shape.
India’s much-awaited Covid19 stimulus is out – all 20 lac crore of economic stimulus got unveiled and the analysed, the key take-away has been the rural-orientation of the substantive parts of the package.
It is now quite evident that the incremental fiscal outlay part of the package is a fraction of the headline number – in the range of 1.5-2 lac crores. This fiscal headline number has received a lot of critique and analyses, primarily because of its limited scale (1 % of GDP). But beyond the quantum, the real curious pointer is the allocation – more than half of the outlay goes to rural India. Between incremental NREGA (National Rural Employment Guarantee Act) budgets, free food grain for migrant workers and some additional budgets for rural public investments – the focus of the fiscal intervention seems to be firmly on rural India.
But, the economic impact of the lockdown has been largely an urban India impact. Rural India, especially agriculture, is in reasonable shape, with a good Rabi crop and good sowing for the Kharif crop as well. It is urban India, with its shut shops, malls and offices, that has been most affected. Most crucially, the largest economic hubs of the country – Mumbai, Delhi, Chennai, Ahmedabad, Calcutta – are designated “red zones”, with limited opening up and hence outsized economic impact not just in these cities but across the country.
Third, the stimulus package is light on direct fiscal intervention, and heavy on creating liquidity and credit backstop for businesses (via credit guarantees and sovereign first default guarantees for SME and NBFCs). Liquidity and credit backstops are critical, but for businesses to survive a period of deep demand destruction they also need direct support to enable them to maintain crucial sinews of business – labour and supply chain.
Putting all three together, there is an intervention-incentives issue arising. How? The answer goes back to Richard Thaler and his Nudge Theory – policy interventions provide nudges (and sometimes a push and shove) for people to react in a certain manner to the nudge.
Add to this how facts on the ground have worked out. With large parts of urban businesses shut, migrant labour from eastern and northern parts of the country have been presented with a double whammy – no income and the ever-present fear of contracting the virus in a “red zone”. Its no surprise that several millions of them want to go back to their villages. As it is, a section of migrant labour does go back during the summer season for a break (and working in the fields for Kharif crop sowing). In short, there is no dearth of extant nudges.
With enhanced NREGA (and other rural) allocations, supplemented by smaller income support programmes rolled out by state governments of UP and Bihar, the nudge has turned into a massive shove. Thinking purely rationally, the migrant labour has to evaluate between a job-less, locked-down existence in a red zone against the prospect of being with family in familiar settings with promise of reasonable income support paid for by the state. It’s a no-brainer!
However, this presents a nutcracker scenario for a host of businesses – demand destruction on a massive scale one hand, and lack of enough labour to restart production/operations even in areas and
businesses where allowed. This is especially true for businesses like Construction, Real Estate, small industrial enterprises and a whole swathe of Supply Chain intermediaries. Already, there is anecdotal evidence of large-scale labour shortfalls in RE construction sites, SME factories and logistics companies serving crucial parts of supply chains. With a number of sectors (like RE) already reeling under heavy leverage, the planned liquidity/credit backstop stimulus wont move the dial for them to survive to fight another day (when economy is back on its saddle), if they don’t have enough people to continue operations even at a reduced scale.
Ergo, we need a slightly modified nudge from the government. Instead of enhanced NREGA, we need a National Urban Employment Programme (NUEP). A targeted NUEP for select employment-heavy sectors – RE, Supply Chain participants, Construction – would kill several birds with one stone. First, and most importantly, it will create incentives that will at least partially staunch the reverse-migration of labour that is happening today. Second, it will give a kind of direct fiscal support to stressed sectors like RE, enabling them to keep operations churning and remaining viable entities. Third, it will keep the sinews of the economy greased enough for a rapid bounce-back when our cities are allowed to open up. While the NREGA construct is work-on-demand for anyone, the NUEP construct can be modified to give first preference to existing employees.
There are obvious issues of perverse incentives – of the state subsidizing private businesses. But payroll subsidies are an oft-used tool to attract business investments – and can be suitably finessed to ensure that NUEP funds are directly accounted for in terms of wages and no other expense. Above all, desperate times call for extra-ordinary measures. The multiplier impact of NUEP – in terms of keeping leveraged businesses viable (and thereby preventing NPAs in the banking system) and stemming a potentially-disastrous en masse reverse-migration – far outstrip its misuse potential. It’s an idea whose time has come!
The author is the Managing Partner at ASK Wealth Advisors. The views and opinions expressed in this article are personal.