Editorial

A MASTER PLAN FOR INDIAN ECONOMY REVIVAL

April 25, 2020 12:50 PM

by Dr Ajay Kumar 

 I see opportunity after this pandemic. Despite all bad, there is too much good to forecast. Yes! Every crisis is an opportunity. China falling is an advantage. Don’t miss it, this is once in a life time opportunity. While this may be a truism, the COVID-19 crisis does indeed provide India with an opportunity to reshape the industrial setting to new heights. Known the amount of the damage to the Indian economy from the disruption to business, a intermediate-term plan for recuperation is the need of the hour. Unlike in 1992, India does not face a balance of payments crisis. Instead, the country requires overcoming challenges such as non-availability of long-term funds and high cost of doing business. This requires simultaneous reform across both real and financial sectors.

I am just writing in an attempt to set out some suggestions for actions to be taken in the short and medium-term for economic revival of India, despite I know, Government of India has no time to see the suggestions. HaHaHa …. I am behaving like “Sanjay” and Government of India is behaving like “Dhritrashtra” (The Blind King –inside out).

Coming to the point, in addition to the urgent motivation which is required urgently to overcome the deep distress in the economy, a medium-term plan is needed to be implemented over two years. This would include not only immediate restructuring requirements to support the economy from the damages inflicted by Covid-19-Corona Virus but also prepare for a more competitive economic landscape over the next decade as fall out of China is sure. Let me discuss first the damages done by this Covid-19-Corona Virus Pandemic in Indian Economy. And then we will be able to ascertain some suggestions for the short-term stimulus and the medium-term plan for recovery.

Lockdown Impact on Economy and its Economic Cost due to Pandemic Covid-19-Corona Virus: Social and Economic activity has slowed down significantly across most sectors rather I must say – its zero excluding the manufacturing sector of food processing, pharmaceuticals and medical equipment are operational, while construction and mining activities have halted completely. Within services, majority of trade, transportation and hospitality remains closed, while financial, IT and government services remain partially operational which is not sufficient?

The sectors impacted badly in this lock-down are – Industry like – Mining, Manufacturing, Textile & Apparel, Metals, Machinery, Petroleum & Others, Trade, Repairs, Hotels & Restaurants, Transport, Communication & Broadcasting, Storage
Financial Services, Real Estate & Professional Services, Other Services (including Health, Education etc), Public admin.& defence. And, non effected services are Agriculture and Pharma which is not badly hit. It is going to be the strength of the Government as it will yield surplus food for County and another one will help us to be medically fit.

Growth Scenarios to forecast GDP: This is the worst hit zone. Not good for Indian youths thighs and not good for India Government eyes. Bottomed on the estimated impact across different sectors, we have estimated GDP growth under three different scenarios: A- Positive Scenario says - Economic activity picks-up slowly post lockdown period and resumes to full capacity shortly thereafter. B. Bottom Scenario says - Pick-up in economic activity is constrained by restrictions on free movement of goods and people even in post lockdown period. C. Negative Aspect Risk Scenario - COVID-19 Corona Virus outbreak extends and spreads further, leading to prolonged restrictions in existing hotspots while ‘new’ hotspots get identified. In the Bottom scenario, we expect that economic activity will resume post the lockdown period but will take time to reach normal capacity levels, as restrictions on people and goods will continue in the identified hot-spot regions even beyond the lockdown phase.

This will lead to disruption in supply chains in lock-down areas, slow pick-up in investment activity is a concern, and labour shortages in the short-run is dangerous and hushed consumption demand on account of reduced household income. The Positive scenario assumes that economic activity will start recovering as soon as the lockdown is removed and will get back to normal in a phased manner within a short span of time, with a boosted sentiments, but be careful, Government has to meet the expectations and give a feel good picture to Country not Industry only.

The Negative Aspect risk scenario assumes that the restrictions on free movement of people and goods in hot-spot regions gets extended well beyond the lockdown phase as the COVID-19 Corona Virus outbreak extends and lingers on for longer. Further, new regions are identified as ‘hot-spots’ leading to increase in number of hot-spot regions. In this scenario, consumption demand will contract sharply, the investment activities will crash, and the government will be forced to increase fiscal spending to sustain the economy and to prevent any humanitarian crisis.

Bottomed Scenario is the worst thing to be known, on these scenarios and the estimated impact on different sectors of the economy, we expect GDP growth to lie between -0.5 and 1.1 per cent for FY2021 as calculated by different reports from many agencies, its average of all of them.

In the Bottom case, GDP growth is estimated at a negligible level of 0.5 per cent while in the Positive scenario it is projected at 1.1 per cent. In the Negative Aspect risk scenario, where the pandemic outbreak gets prolonged, thereby restricting full restoration of economic activity for an extended period, the GDP growth for FY2021 could possibly contract by as much as -0.5 per cent.

A. Loss of Jobs and efficiency: The Indian labor force has many people employed informally – estimated at a minimum of 60 per cent. They could be casual labour employed in the formal or informal sectors or self-employed in various professions. According to the last labour survey for 2017- 18, out of a total of around 480 million workers, 250 million were self-employed while 109 million were casual labour. The efficiency of these labors are at risk, due mental and financial problems.

The worry is that the sectors which generate most of the employment, including both manufacturing and services, are all currently under lock down. As per report and my research on employment generation, the ten largest sectors by employment are: building, construction and real estate; beauty and wellness; retail; transportation, logistics and warehousing; tourism, hospitality and travel; electronics and IT hardware; handloom and handicrafts; textile and clothing; food processing; auto and components.

Many of these sectors are dependent on informal workforce to a large extent. In the construction sector, which is considered the largest non-agricultural sector by employment, the share of casual labour was 83.7% as per the latest labour force survey for 2017-18.

*Cash Transfer to poor and lower middle class: • Additional support to the lowest strata and the informal sector, Provide cash transfer, amounting to INR 3 lakh crore to JAM account holders, (In addition to 1.7 Lakh crore stimulus already announced) And lower middle class to be paid Rs 18000 in three installments. And, Warrant to be issued to Industry, with clear cut message – no firing, only new hiring allowed. And no pay cut to the ranks below – General Manager/VP.

The lockdown has strained several million casual labourers to either move to over 22,000 relief camps being run by central and state government agencies or back to their hometowns and villages. Their jobs and livelihoods are at risk as most of them neither have any formal contracts with their employer nor are covered under any kind of social security schemes of the government. Being at the bottom of the population pyramid, they are likely to have little to no savings to tide over this lockdown phase. This is worry situation politically and economically for the Government.

What is not as visible as the other losses is the loss in productivity that is taking place. This could be due to a combination of the following reasons: a) disruption in the manufacturing process b) work from home in services while possible but limits team collaboration no healthy did not gave much productivity, and c) reduced availability of labour after the restart and many other reasons. As a result, it will take some time before businesses can be expected to perform at their pre-lockdown level of productivity.

B. Recuperation from the Downturn: Fiscal incentives required without negotiations.

According to birds eye view, as India already has a high level of government debt (with a general government debt-GDP ratio of 68.1 per cent), a further increase in fiscal spending is hard to afford and will surely lead to a rating downgrade. Yet, a comparison with major G-20 countries shows that India’s debt level is not that high. Further, the incentive so far provided by the Finance Ministry is small compared to many of the other countries that are fighting the COVID crisis. Still rating is importna or County - Its Government needs to decide, as rating can be achieved, but loss of people faith in the Government and its machinery is not achievable in one or two years. Mind it.

This still allows the government to provide a razor-sharp but temporary incentives that can be withdrawn once the economy is back on track. Without such a step, the budget will continue to bleed for several years, as the revenue shortfall continues. At this stage, the government must do whatever it takes to tide over the crisis. The RBI will be required to provide support through secondary market purchases of government bonds, especially for state governments. The state Governments must understand its national crisis not there “Papas crisis at home”.

Some of the elements of the fiscal cost will include the following:

 The cost on additional health infrastructure such as hospital beds, medical equipment and drugs required to treat the surge in patients (Centre and States). It should be joint efforts. There should be Master Hospital in every district, not to be allowed in one district 100 Hospitals.
 Cash Transfers to the poor who have lost their jobs and livelihoods will be necessary, as a consumption booster (Centre and States both needs to do the best no blame game theory will help them in long run, even politically). And issue notice not fire, only to hire is allowed in this Country.
 Support to businesses who are facing distress and are unable to repay their loans and make statutory payments. They need government support, both general as well as sector specific ones in stressed sectors such as aviation, retail, tourism and hospitality (Centre). Sentimental boost is important. They should feel that Government is for them as they knew Government as torturer, blood sucker and looter to Companies. This tag needs to be removed from Government face.

We expect the Central government’s spending (not including the spending on health) to be a little over Rs 8 lakh crore (or 4 per cent of GDP). Further details of the suggested interventions are given in the table below.

Cash Transfer to poor and lower middle class: • Additional support to the lowest strata and the informal sector, Provide cash transfer, amounting to INR 3 lakh crore to JAM account holders, (In addition to 1.7 Lakh crore stimulus already announced) And lower middle class to be paid Rs 18000 in three installments. And, Warrant to be issued to Industry, with clear cut message – no firing, only new hiring allowed. And no pay cut to the ranks below – General Manager/VP.

Support to enterprises: Wage and interest support includes some bailout, Banks should provide additional working capital limits, equivalent to April - June wage bill of the borrowers at least, backed by a Government guarantee, at 4-5% interest. A similar carve out could be provided for the April – June to relax the enterprises and work as usual as they were working pre pandemic. Government need to hug them, and tell them we are one.

Pre-empting bank failures: It is possible that the pain in the real sector would soon manifest in terms of non- performing loans for banks. I must include to allow the Directors who has been deactivated to run Companies dung demonetization. For banks to increase their lending in this environment of risk aversion, they should be assured of a government backstop either in terms of recapitalisation or government guarantee on loans. Banks churning will give headache to government. Bank in this government is churning, let banks earn from good sources not by unlawful and in human behavioral charges.

While RBI has taken action to provide surplus liquidity to banks, the transmission to companies is proving to be difficult, due to extreme risk aversion among banks and other lenders in the current situation. To overcome this bottleneck, CII suggests a two- pronged strategy:

 The creation of a fund or SPV with corpus of Rs 2.5 lakh crore which will subscribe to NCDs/Bonds of Corporates rated A and above. The fund can be seeded by the Government contributing a corpus of Rs 20000-30000 crore, with further investments from banks to the tune of Rs 80,000-90,000 crore and balance Rs 100,000 crore brought in by financial institutions such as LIC, PFC, EPF, NIIF, IIFCL et al. This will limit Government exposure while providing adequate liquidity to industry. No options left.

 A credit protection scheme for MSMEs whereby 75-80% of the loan should be guaranteed by RBI, i.e. if the borrower defaults, RBI should buy the loan and repay the bank upto 75-80% of the loan, so the risk to the lender is limited. SIDBI could provide the guarantee for loans to industry and trade while NABARD could provide the guarantee for loans to agro-processing sectors.

Medium-term plan

While the short-term incentives are urgently required to repair the economic damage, it may not be adequate to prepare the economy for a sustained recovery. A medium- term plan is required to build a more competitive economy with better opportunities for trade and investment. The plan needs two elements: structural reforms for competitiveness and a financing plan. Given below are brief ideas on what is required.

Structural reforms

From my side I made many recommendations for economic reforms, most recently at the beginning of the present government’s term. Structural reforms are now urgently required for reducing the cost of doing business. They would also renew confidence in the economy and support the recovery in the medium-term. Broadly, they fall in the following five buckets.

 The cost of transportation and logistics needs to be lowered through better quality infrastructure. The National Infrastructure Plan has laid out the details. Serious implementation is now required. Ease in transportation and linking lower class logistic companies also to be a part of Railways so that they may ean to return and deploy new people.

 Commercial power tariffs remain high in India must lower it for two years, further affecting industry’s competitiveness. Further, the state power distribution companies are running at huge losses. Taking forward the reform / privatization of the Discoms is necessary. In this ask them to wave of two months bill of Middle class and Poor and farmers with full and final settlement of that payments to Discoms. It will help them. It will help India.

 The cost of credit remains high and credit availability is constrained. Reform of the banking sector including reduction of government stake in public sector banks is required to improve governance and address their NPA problem. The availability of long-term funds must be stepped up by strengthening institutions such as IIFCL and NIIF. Ease the norms of ECB. Ease the funds to come to India by any means. Inflow not be restrained.

 The high level of regulatory permissions required for businesses affects the Ease of doing business. This includes the difficulty in getting access to reasonably priced land for industry. Reforms by State governments are especially important in this area. I find there is no ease of Business as “ Apps doesn’t have to understand the sentiments. Doing Business means treating Industrialist as a “Tool” to generate money. Not good. Business needs emotions. You made it, mechanical. Whosoever, is your adviser must be joker in Government. It is India, mood hone pe khate hai, bhookh lagne pe nahi.

 And, you are ill equipped with Tax norms. Why to make fear among Industries about taxation nos. Due to ou they have to be under Charted Accountants, The CA has not invested a single penny but he dictates on behalf of Government Policy to owner of the Business. Its not good. Complicated taxation structure, especially in indirect taxes. There are too many tax rates, both import tariffs and GST, which makes the system irrational and open to evasion. A three-tier tax structure with raw materials and intermediate goods being taxed at a lower rate than final products must be implemented. In addition, the GST structure can be simplified in the form of one registration and bringing down the GST rates to at best three, including zero. The currently exempted products such as petroleum products, natural gas, alcohol, electricity should be included under the GST ambit.

 Labour market reforms are required to enhance labour market flexibility and provide incentives to small companies to increase their scale and employment. Threshold limits under labour laws such as Industrial Dispute Act, Contract Labour Act and Factories Act limit the size of enterprises and good quality employment in the country.

Macro stability

For the medium-term, it is important to return to macro-stability. A roadmap for fiscal consolidation should be drawn up and any sign of inflation should be nipped in the bud. In case of food inflation, supply side management can be useful in holding prices instead of monetary tightening.

Although there is little or no likelihood of a balance of payments problem in the current situation, there may be a surge in imports as the economy recovers. The RBI’s substantial foreign exchange reserves provide comfort that such a situation can be managed. The accompanying structural reforms should be aimed at reviving the prospects for India’s exports.

While the immediate budgetary spending should be made to save lives and protect businesses, measures should be taken to maintain financial stability in the medium term. Most importantly, financial contagion must be avoided by protecting the health of the financial institutions.

Overall, a combined programme of short-term spending and medium-term reforms are necessary for a sustained economic recovery. Such a plan will revive India’s prospects and help narrow future fiscal deficits.

Conclusion: Showing muscle power to world in this time is not needed, as well as, this is not the time to take world on your side by purchasing arms. It is the time to take our side by filling the gap created by Chinese manufacturing sector. If we lose, this will be a great loss for India to be super power on “Value Based”. This will force world to include you in UNSC. This will happen only when – The Governments help The Citizens and Then Industry. Don’t fall flat in the name of Gujarat Phobia and indulge India into a big trouble. It time to “Boot-up to reboot and reinstall the supervision of India. Good Luck. Jai Hind.  (Writer  Dr Ajay Kumar is the Chairman of Fox Petroleum)

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