Massive stimulus needed to combat Covid-19

Despite bitter political bickering, the United States passed its highest ever relief package to support the economy. It is valued at 2.2 trillion dollars, and another one trillion is coming, if not more. That would make it nearly 15 percent of the US GDP, as against 0.8 percent announced by India’s Finance Minister last week. And even that meagre announcement of India had items which had already been budgeted for, and hence were not part of the new relief spending.  Keep in mind that the political bickering in the US Senate and Congress was not about the size of the package, but its composition. The Democrats claimed that the earlier proposal was too generous to corporations and too stingy to workers. Hence the revised proposal had a provision for a direct cash payment to every adult in America, barring a small minority earning a very high income. There were also tax breaks and loan incentives to companies to not retrench workers, and keep them on the payroll.

For nearly 90 per cent of the workforce, staying at home means loss of income. The production, work and income stoppage can feed itself into a downward spiral.

Roughly one fifth of America’s workforce is sitting at home due to the lockdown. Just this past week, the number of jobless claims, i.e. the unemployed who apply for unemployment insurance, rose to 3.3 million, the highest in history, and 15 times the normal number. Of course, the US has now more patients infected by the Covid-19 virus than China, and New York city is the epicenter. That the giant USD 2.2 trillion relief bill was passed under a Republican President, and not a left-leaning spendthrift Democrat President is also very significant. There is bipartisan consensus that drastic relief measures are necessary.

So, it should be clear that India too needs a much more massive stimulus than has been proposed as of this writing. The countrywide lockdown has stopped two thirds of the economy, although some exceptions are emerging. Hence the stimulus has to be immediate so that it can act as a safety net to those whose income has suddenly stopped (the daily wage earners, the informal sector).  The social distancing and isolation helps only the organised sector, or the high income earners or those with higher skills. The work-from-home person who can be productive and continue to earn an income despite being in isolation, is from a small privileged class in our society.  For nearly 90 per cent of the workforce, staying at home means loss of income. The production, work and income stoppage can feed itself into a downward spiral.

First, the factories have shut down, partly because of absence of workers, and partly because non-availability of trucks and rail to transport their production. The chain effect of the lockdown works as follows: first small and large businesses and factories have shut down; imports have stopped due to supply chain disruptions, or because customs officials do not want to risk contamination; next production stoppage leads to income and wage loss for a big part of the workforce; next, consumers preserve their savings, and cut back on spending; next, the lack of demand and future uncertainty leads to drop in investment; (private sector investment was anyway stagnant for the past five years); this leads to inventory pile-ups, business failures, bankruptcies, bad loans, banking stress, causing production to fall further. This downward spiral can very quickly lead to a drastic fall in GDP, income and rise in unemployment. This may also be accompanied by rise in prices especially of essential commodities, and hence inflation.

The countrywide lockdown has stopped two thirds of the economy, although some exceptions are emerging. Hence the stimulus has to be immediate so that it can act as a safety net to those whose income has suddenly stopped (the daily wage earners, the informal sector).  The social distancing and isolation helps only the organised sector, or the high income earners or those with higher skills.

That is the reason why we need an immediate and massive stimulus. Of course, the first fiscal package was announced last week, and the Reserve Bank of India followed it up with a large monetary stimulus. The latter gave much needed relief on loan repayment, and injection of liquidity. We have to see how much of it translates as new loans for much needed working capital, especially for small and medium enterprises. But anomalies remain. For instance, companies which have bank loans get a three-month moratorium on repayment, but those who borrowed from the capital market through debentures and bonds do not. There is thus an asymmetry, caused perhaps because banking and capital markets are governed by two different regulators. It is here that we need crucial coordination between all agencies, be they government departments, ministries, regulators or the State government. Another example is from manufacturing. Stoppage of production means even essential goods get affected. For instance, chemicals needed for producing soaps, sanitizers and water purification, or fabric needed for producing masks and protective gear for healthcare workers.

The government has been working non-stop and proactively to take feedback from the industry, to examine whom to exempt from the lockdown and prohibition on movement. In the State of Maharashtra, it seems more than three lakh applications were received in the first two days itself, asking permission for truck movements. The authorities said that such unconditional wholesale exemption will defeat the very purpose of the lockdown.  Hence the Central and State governments have to quickly work out a coordinated approach to managing exemptions while still keeping the benefits of the lockdown. Much empowerment of lower-tier governments, and delegation of authority is needed.

But fiscal funds have to mostly flow from the very top. The fiscal funds, say three to five percent of the GDP, have to be raised from current and future resources. In the present, the large stock of food-grains needs to be liquidated at the earliest, including a selloff in the private markets.

Unlike the US we do not have adequate controls or tracking mechanism to pay employers not to retrench workers.  Hence the direct relief to the informal sector should not just be cash, but food grain, oil and soap through the public distribution system. Remember there are probably ten crore destitute even without a ration card, who must be reached.

Raise excise on petrol and diesel within reasonable limits, without causing inflation. As for borrowing from the future, float special COVID-19 bonds worth two or three trillion rupees. Ask the RBI to subscribe to the incremental deficit of another percent of GDP. Transfer this as cash injection to all households, and also wage supplement as incentive for firms not to retrench workers. Unlike the US we do not have adequate controls or tracking mechanism to pay employers not to retrench workers.  Hence the direct relief to the informal sector should not just be cash, but food grain, oil and soap through the public distribution system. Remember there are probably ten crore destitute even without a ration card, who must be reached. Reduce the tax burden of GST, and allow a moratorium on all payments due to the government, i.e. on utilities, taxes, royalties and other duties. This is not a waiver but moratorium, without interest or penal provisions. Increase substantially the public spending and production of healthcare equipment.

The immediate fiscal push is but a first step. We will also need to get the economy ready to move into higher gear, once the lockdown period is over. That rebooting will have to be led by the private sector, which will need another, i.e. second dose of massive support in terms of fiscal incentives, and economic reforms. Luckily, for now the infection spread is under control, and there is light at the end of the tunnel. For that tunnel to end quickly, we need much more fiscal fuel in the engine of our economy.

(Dr.Ajit Ranade is a senior economist and Senior Fellow, Takshashila Institution)