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Cash, Not Credit, Is The Key
The government must generate demand by putting money into people’s hands. There is pent-up demand among middle-class professionals. Used car sales, for example, are likely to spike by 50 per cent as safety-conscious consumers opt for private transport over Uber/Ola cabs
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This column has long argued the need to focus on six key reforms: privatisation, agriculture, tax, land, labour and laws. Of these, Finance Minister Nirmala Sitharaman has shown positive intent on sustainable privatisation and opening up agricultural marketing to benefit farmers.
Land reform remains a touchy subject. The Land Acquisition Act 2013 is stuck in the Rajya Sabha due to lack of political consensus. Labour reform has meanwhile run into hurdles from both RSS affiliated trade unions and the International Labour Organisation (ILO).
The personal tax has remained untouched. The excellent report on the Direct Tax Code (DTC) submitted by a special panel is gathering dust in the Ministry of Finance (MoF). Hundreds of archaic colonial-era laws continue to stay on the statute books though, to be fair, the Narendra Modi government has scrapped 1,500 mostly nineteenth-century laws over the past six years.
It’s important to put the finance minister’s economic package through a series of litmus tests. Start with credit versus cash. Most of Ms.Sitharaman’s Rs. 20.97 lakh crore economic package comprises concessional loans to MSMEs, discoms and other stressed sectors. The government will stand guarantee for part of the loans. But it is banks, NBFCs, HFCs and MFIs which will hand out the loans. Already overburdened with NPAs, it is not a prospect they relish.
The sectors that most need liquidity continue to be ignored. Hospitals, healthcare centres and medical professionals have borne the brunt of the Covid-19 pandemic. They received nothing from the economic package. It is a travesty the finance minister must correct with a supplementary grant.
What about the 120 million-plus migrant workers who have suffered the greatest deprivation during the lockdown? They have been given 5kg of free food grains per person with or without a ration card. In addition they will receive a transfer of Rs. 500 into their Jan Dhan Yojana bank accounts.
All this is pitifully little. The 65 per cent increase in the MNREGA budget (amounting to an additional Rs. 40,000 crore) is welcome but the migrants from Bihar and UP – treated so appallingly by the Maharashtra and Delhi governments – may not return to their jobs on construction sites and factories, causing critical labour shortages just when the economy is opening up.
How should the migrant workers' problem have been handled? The short answer: with cash.
Most surveys measuring those living below the poverty line (BPL) conclude that around 20 per cent of India’s 135 crore people can be classified as extremely poor. That’s 27 crore people. At an average of five dependents per family, this amounts to five crore families living below the poverty line.
An allocation of Rs. 5,000 per month per family for the next three months – June, July and August – would relieve much of the stress migrant workers have faced. Along with generous free rations already allocated to them, the cash transfers will allow them to rebuild their lives.
How much would this three-month outgo cost? Assuming Rs. 5,000 is transferred to the Jan Dhan Yojana bank accounts of each BPL person (and of the 12 crore migrant workers around half or 5 crore would qualify), the cost would be Rs. 25,000 crore per month. Over three months, the impact on the government treasury would be Rs. 75,000 crore – less than 4 per cent of Ms. Sitharaman’s Rs.20.97 lakh crore economic package. The benefit – both human and moral – would far outweigh the cost. It is food for thought for Ms. Sitharaman as she begins to put her economic package into action.
The finance minister will point out the government’s difficult fiscal position. Tax revenue has imploded. GST figures for April 2020 were not published as scheduled on May 1. The finance ministry says they will be finalised and published only on June 30. Corporate tax revenue is likely to take a major hit following the prolonged lockdown. Maruti, for example, produced zero cars in April 2020 and 200 cars for exports. It is now struggling to get workers to its plants and ramp up production. Personal tax revenue too is set to decline in 2020-21.
To make up for what could amount to an overall tax shortfall of around Rs. 5 lakh crore in 2020-21, the government is keeping its powder dry. First, it has steeply increased excise duty on petrol and diesel even as crude oil prices crash. This could help the government garner an additional Rs. 2.5 lakh crore if crude remains soft for a part of this fiscal year. Second, the government has announced it will increase market borrowing by Rs. 4.2 lakh crore from the budgeted Rs. 7.8 lakh crore to Rs. 12 lakh crore.
These two devices will give the Modi government an extra Rs. 7 lakh crore to cushion the fiscal ravages of Covid-19 – with a bit left over for the small cash component of the Rs. 20.97 lakh crore economic package.
Ms. Sitharaman’s next course of action should be to transfer Rs. 5,000 per month for the next three months into the Jan Dhan Yojana bank accounts of the very poor – nearly half of them distressed migrant workers.
They could form the backbone of India’s industrial recovery in 2021 when factories around the country will need all the skilled and semi-skilled labour they can get.
The prolonged lockdown is expected to take a heavy toll on industrial productivity. Global rating agencies like Moody’s have projected negative GDP growth in 2020-21. The Reserve Bank of India (RBI) too expects the economy to shrink this year.
The government must generate demand by putting money into people’s hands. There is pent-up demand among middle-class professionals. Used car sales, for example, are likely to spike by 50 per cent as safety-conscious consumers opt for private transport over Uber/Ola cabs or shared taxis.
The opening up of domestic air travel will help the economy revive in two ways: first, the aviation sector sets off collateral engines of demand: air turbine fuel, technical jobs and local transportation; second, air connectivity opens the way for suburban trains and the metro. Getting to and from an airport without local rail transport is untenable. The government will have to open up suburban trains with passenger carriage limited to perhaps 50 per cent as India enters the next phase of its interminable lockdown.