India’s GDP has fallen by 23.9 per cent in the first quarter. Tax revenues have fallen even more and the fiscal deficit has risen sharply. The provision of a demand stimulus at the earliest is imperative. The impact of the stimulus, which injected considerable liquidity in the system, has been modest. The government guarantees for loans to small and medium enterprises has, however, been effective and credit is flowing. Where else can government guarantees be used to generate demand?

One major demand generator with a huge multiplier effect and considerable employment potential is the housing sector. It generates demand for a range of products, ranging from cement to steel to paint to electrical fittings. A radical out-of-the-box measure would be for the government to take over all stalled housing projects of developers across the country, guarantee fresh debt for completion of these projects, appoint an empowered CEO with the mandate to renegotiate existing contracts or award fresh ones, and have construction restarted in this calendar year itself. This one measure alone could begin to change market sentiment. Those who had booked flats would be delighted. The developers have land banks which would see value appreciation after recovery. The risk of the government guarantee being invoked, even partially, is minimal and is well worth it.

Initiatives for the working class

The Finance Minister had announced that a programme for affordable housing for migrant workers would be launched soon. The strategy for affordable housing for migrant workers needs a different paradigm. So far, affordable housing has been promoted through a provision of interest subsidy by the Central government. These are for ownership; migrant workers need rental housing.

To create rental housing and manage them, the pre-1991 role of State-level development authorities and housing boards have to be revived. They need to assemble land, build and rent at affordable rates. The accommodation so created should also be suitable for dormitory use, as many migrant workers are single. The Central government could ensure 100 per cent financing of such affordable housing projects to State-level agencies, with the State government providing a guarantee. The prevailing interest subsidy for affordable housing may also be given to these projects. The advantage would be that a large number of projects could be started across the country in the coming months. The systems for managing these properties can be evolved simultaneously.

The State governments would need a change in mindset to price land at nominal rates to ensure that a feasible rental income covers maintenance and debt repayment. The Central government could set an example by getting the Delhi Development Authority, the Railways and its public sector undertakings to offer land for such projects. It may be recalled that the Council Housing programme in London was highly successful in providing affordable rental housing to working-class families.

In advanced industrial economies, relief packages have included direct payments to those who have become unemployed as well as to firms to retain workers who they may have otherwise shed. Given the nature of our economy, this has not been feasible. The poor are now getting relief through the MGNREGA and the food security regime, to which an additional free supply of foodgrains has been added. But, now, large numbers from the middle classes are losing jobs. One way of giving them relief and also sustaining demand is for the government to guarantee bank loans to them up to half their income of the previous year as declared in their tax returns. This would be a simple objective criterion.

As the economy regains its growth momentum, they would get employed and would be able to repay their loans. The immediate benefit would be to moderate the large reduction in consumption demand that would otherwise take place.

Auto reforms

Air pollution has been having a severe adverse health impact especially in North India. Trucks, buses, taxis, personal cars, three-wheelers and two-wheelers contribute substantially to air pollution. BS-VI vehicles and fuel have been introduced from April 1. But the benefit of better air quality would be experienced only after the existing fleet of vehicles of earlier BS categories go off the road. An easy way to accelerate the phasing out of old polluting vehicles is to introduce a variant of the ‘cash for clunkers’ scheme that Germany introduced to help their auto industry during the 2008 financial crisis. Under this scheme, those who traded in an old vehicle and bought a new one got a cash rebate. A grant of 50 per cent rebate in the GST for an old vehicle that is traded in for a new one should be a sufficiently attractive incentive. The old vehicle should be physically scrapped in a licensed state-of-the-art facility.

In addition to this carrot, there should be the stick of withdrawal of registration in a phased manner starting April 2022. The objective should be complete replacement of all pre-BS-VI commercial vehicles by 2025. With this, the demand in the auto sector would pick up substantially, giving relief not only to the auto industry but also to the components industry, and preserving many jobs. The government would also get additional revenue of 50 per cent of GST from the additional demand so generated.

To increase the demand for electric vehicles, power distribution companies may be directed to invest in the charging infrastructure in cities, starting with the larger ones first. The State regulatory commissions may be given a policy directive to provide the regulated return on these investments. The lack of infrastructure has been keeping demand low. With the charging infrastructure in place, the demand for electric vehicles would surge as they are now cheaper to run.

Thus, demand can be generated to utilise more of the large liquidity already provided in the economic stimulus. It would, however, be a mistake to think that this would suffice. Additional fiscal and other policy measures to increase aggregate demand substantially are needed to get the economy to recover. The situation calls for urgent steps.

The writer is former secretary, DIPP and distinguished fellow, TERI. Views are personal