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The Second Wave in Need of a Second Economic Stimulus

It has been found that MSMEs benefited most from the Centre's sovereign credit guarantee scheme and so a similar scheme should be announced by states to provide the much-needed liquidity shot to MSMEs.

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A second wave is creeping back in India and is poised to rage across the country through 2021. This wave constitutes an imminent threat to society, with a potentially immense toll in terms of human lives and catastrophic economic impact, exacerbating the financial woes of millions of Indians. With the peak of the second wave yet to come in the coming months, its impact on all spheres of life across the country could be of varied magnitudes.

In theory, the economy should be the last thing on one’s mind in the wake of such a crisis, however, this health crisis quickly snowballed into a catastrophic economic crisis. It goes without saying that our economic performance is largely dependent on the performance of the health sector and the inoculation programme. 

Some experts believe that businesses are better equipped to deal with the economic repercussions of the second wave. When evaluating the long-term impacts on the economy, it is predicted that the impact should be minimised due to government intervention through several steps to check production loss, especially by MSMEs.                

Despite fundamental aspects being in order the clutches of the pandemic remain uncharted to a large extent. As a result, many experts believe that the worst is yet to come. Interestingly, the economic decline itself has an adverse effect on health; a reduction in economic activity reduces the circulation of money and, with it, tax revenues. This then results in a reduction of the finances available for the public-health countermeasures which are needed to control the pandemic. It also hits individuals and families, who may see their income plummet catastrophically and thus may not be able to afford the required healthcare. Depleting of financial reserves may also make companies close, with consequences for their owners, employees, and suppliers. In all obviousness, this setting would have developed very differently in a setting in which there is a workforce with access to free healthcare and income protection, then in one in which much employment is casual and people must choose whether to go to work when ill or to starve. The increasingly integrated global economy increases the fragility of this situation. 

In order to tide over the second wave, an introduction of additional economic measures is imperative. As a result, such a stimulus must be tailor-made for the most-impacted people and businesses. For instance, states with high COVID cases such as Maharashtra, NCR region, Tamil Nadu and Gujarat also account for nearly 45 per cent of employment in MSMEs and 41 per cent of overall MSME credit. Notably, stringent lockdowns in the aforementioned states have pushed thousands of MSMEs on the brink of a closedown or have already shutdown. In view of this, the Tamil Nadu government announced a special incentive package to promote MSME investments. Other pandemic-hit states should also follow suit and announce incentives for MSME investments to build supply chains under the Centre's PLI scheme.

An adverse impact can be seen on retail loans disbursed by banks and NBFCs, wherein a large number of informal loans are disbursed by shadow financers. Hence, an economic package tailor made for needs of vendors and small ticket personal loans can be implemented by state governments in conjunction with RBI and Centre. In addition to this, RBI window of one-time restructuring of MSME advances should be extended until 31 March, 2022. It has been found that MSMEs benefited most from the Centre's sovereign credit guarantee scheme and so a similar scheme should be announced by states to provide the much-needed liquidity shot to MSMEs.

Furthermore, Maharashtra temporarily reduced stamp duty on real estate to push the demand side upward leading to a marginal revival of the sector. A similar scheme can be announced by states which will revive the real estate sector—one of the largest employers of informal jobs. 

Measures and relaxations offered by the government can be magnanimous, but its effectiveness will be washed out if the inoculation programme remains sluggish. With international financial crises and recessions; unsustainable inequality in income, wealth and across regions; the climate emergency; and the threat of future pandemics, the need has never been greater for balanced economics and systemic change. Therefore, a speedy vaccination programme coupled with balanced measures introduced by the government will be the best antidote to revive demand and restore our national treasury.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.


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economic stimulus

Sonam Chandwani

The author is the Managing Partner at KS Legal & Associates and heads the firm's Corporate Litigation Practice. She specializes in commercial structures, commercial litigation, mergers & acquisitions generally, with an emphasis on large scale and complex commercial litigation including contract law, trade practices, real estate disputes and finance issues across a range of industry sectors.

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