Coronavirus scar to haunt economy for long

In a span of less than a week, there have been three sets of official announcements enumerating the measures to alleviate the problems faced by industries, businesses and workers due to the economic disruption caused by COVID-19. The first two were made by Finance Minister Nirmala Sitharaman on March 24 and 26 and the third by the RBI Governor Shaktikanta Das on March 27.

On March, the FM announced reliefs for industries and businesses which are largely ‘procedural’. These include extending the date for filing returns [income-tax, GST, customs, excise and statutory filings under Companies Act], reducing interest chargeable on delayed payments, exemption from penalty, increasing threshold of filing under the Insolvency and Bankruptcy Code [IBC] etc. The firms have been given leeway for three months up to June 30 to complete various filings and submissions etc.

On March 26, Sitharaman announced the PM Gareeb Kalyan Scheme [PMGKS] aimed at providing immediate assistance to millions of poor. The scheme entails total expenditure commitment of Rs 1,70,000 crore. It proclaims relief in about a dozen areas.

The payment of first instalment of Rs 2,000 to farmers under PM KISAN in first week of April is merely a rehash of what is already being done. The relief from welfare fund for building and construction labourers [it has around Rs 31,000 crore] is not quantified. The increase in collateral-free loan limit for women self-help groups [SHGs] under Deen Dayal National Livelihood Mission [DDNLM] is not a cash transfer or grant.

The 24% contribution by the Union government to the employees’ provident fund (EPF) for three months is hamstrung by a rider that says ‘entity should have 90% of its employees earning less than Rs 15,000 per month’. Even if the number is 89%, it won’t be eligible. The amendment to EPFO regulation [enabling workers draw up to 75% for their contingency expenditure as non-refundable advance or three months of wages in advance whichever is less] merely allows them to withdraw their own money!

The areas promising tangible benefit include giving five kg of rice or wheat per person per month for ‘free’ to around 80 crore people through the public distribution system [PDS] plus one kg of preferred and region-specific choice of pulse per household; ex-gratia of Rs 500 per month to Women Jan Dhan account holders; free gas cylinders to Women Ujjawala scheme beneficiaries and increase of Rs 20 in wage rate of workers under MNREGA. For a family of five headed by a woman Jan Dhan account holder, these will add up to benefit of about Rs 2,500 per month or Rs 7,500 in three months.

This is nearly half of the income loss Rs 4,550 per month [national minimum wage of an informal worker at Rs 175 per day and 26 working days in a month] if she doesn’t get to work – a scenario in the current lockdown. Besides, the scheme leaves out tens of millions workers, vendors, hawkers etc, and those who have taken loans under the much-trumpeted MUDRA Yojana.

India’s working population is about 40 crore. Of this, 94% or 37.6 crore are in the informal sector. The compensation to them at Rs 4550 [call it direct income support] will require about Rs 1,70,000 crore per month or Rs 5,10,000 crore for three months. Clearly, what the FM has offered - Rs 1,70,000 crore - is just about 1/3rd. Even this limited package will severely impact the government’s fiscal position.

Fiscal deficit

In the budget for 2020-21, FM had pegged fiscal deficit [FD] at 3.5%. This was based on tax revenue of Rs 15,75,000 crore - an increase of 31% over the likely actual for 2019-20 [Rs 12,00,000 crore] and proceeds of disinvestment in PSUs at Rs 2,10,000 crore.

Already, these targets were inflated; post - Corona crisis, these look like a daydream. Moreover, 3.5% does not capture deferred subsidy payments [DSPs] and extra-budgetary resources [EBRs]. Making adjustment for all these factors, FD will be at least 7%. Add to this, expenditure commitments under PMGKS, it will be close to 8%.

In this backdrop, a suggestion by some experts to relax FD target say by 1% is amusing. Another idea to increase central excise duty [CED] on petrol and diesel [already, the government has taken parliament’s nod for increase in duty by up to Rs 8 per litre each] may look attractive when seen in the backdrop of crude oil plummeting to below $30 per barrel.

The measures announced by RBI governor on March 27, 2020 include a reduction in policy rate [interest rate charged by the apex bank on loans given to banks] by 75 basis points to 4.4%; three-month moratorium on payment of instalments in respect of all term loans outstanding on March 31, 2020; relaxation in the norms for cash credit and working capital limits; reduction in cash reserve ratio [CRR] [portion of deposits, banks are required to keep with RBI] by 100 basis points to 3%; auction of targeted long term repo operations of 3-year tenor for total amount Rs 1,00,000 crore at floating rate; accommodation under Marginal Standing Facility [MSF] to be increased from 2% of SLR [statutory liquidity ratio] to 3% with immediate effect till June 30, 2020.

While the last three measures will inject a total of Rs 3,74,000 crore in the country’s financial system, others seek to reduce the cost of capital and ease the stress of loan repayments. However, in a situation of demand destruction, economic activity coming to grinding halt and weak sentiment, it is anybody’s guess whether this massive dose of liquidity and rate reduction will help arrest the slide. To sum up, while we may defeat Corona, the scar it leaves will continue to haunt the economy for a couple of years.

(The writer is a Delhi-based policy expert)