Poor need cash, but who’s listening?

Subir Roy | Updated on May 28, 2020

Their savings would have dried up during the pandemic. Yet, the Centre persists in being fiscally conservative

There is now wide agreement for a fiscal stimulus, if need be by printing money, to revive the economy. The next logical step should be to pay cash to those on the edge of starvation like the migrant and other workers without jobs and savings. But there is much resistance to biting the bullet at virtually every step. Here is what is happening and what should follow.

With the economy beginning to slowly revive but the Reserve Bank projecting economic contraction in 2020-21, it is imperative to get the policy package right to sustain the revival and maybe turn the prospects around.

Powerful and forthright advice comes from former RBI governor Raghuram Rajan. He finds the ₹20.9 lakh crore stimulus package inadequate in addressing the years of drift that have preceded the lockdown. If more is not done then the economy will become a shadow of its former self.

Loans won’t help

Several key sectors of the economy need repairs — big firms in airlines, tourism, automobiles and construction. The financial sector, in deep distress for long, needs restructuring, recapitalisation and plugging the hole in the leaking bucket. MSMEs need urgent help and there is no point in giving them further loans when accessing these takes time and they are already heavily indebted. And migrant workers need money for vegetables, cooking oil and shelter, beyond foodgrains — all available only against cash.

But perhaps the most important advice that Rajan has for the government is that it must consult the best talent available, wherever they might be on the political spectrum. A catastrophe of this magnitude cannot be addressed by the PMO alone.

A name that automatically comes to mind is former finance minister P Chidambaram. He finds that most countries have followed the path of fiscal stimulus — spent more — to counter the consequences of the coronavirus, but the Prime Minister refuses to do so. The country needs a new budget for the current year which will up expenditure by a third to ₹40 lakh core. For this, the government must borrow and monetise — print money. Many countries did this is 2008-09 and saved themselves from deep depression.

The theoretical argument for the need to spend upfront has been spelt out by Deepak Nayyar, economist and former vice-chancellor of Delhi University. His diagnosis is that the government wants to focus on the supply side with an emphasis on providing liquidity through lines of credit. But the demand has to be revived first to kickstart the economy.

Once demand revives supply will pick up. There should be a fiscal stimulus of 3-4 per cent of GDP (the ₹20.9 lakh crore package contains a fiscal spend of barely 1 per cent), modest compared to what other countries have done. A monetised deficit might be the only way to increase aggregate demand.

Instead, the government keeps doing what it has done till now. Finance Minister Nirmala Sitharaman has again emphasised that there is now a 100 per cent guarantee backing loans, should they go sour. Therefore without fear bank officials should take the automatic route and give term and working capital loans to every eligible entity. She has repeatedly told bankers they need not fear the 3Cs (CBI, CVC, CAG). She hopes that from June 1 liquidity will start flowing from banks without any collateral.

But it is not clear how government guarantee will remove the fear of the 3Cs. The guarantee implies that a loss asset of a bank will be reimbursed by the government and will not have to be charged to profit and loss. But procedures will have to be followed and a future investigation can always find transgressions to pursue. To take an extreme example, if a working capital loan has been sanctioned on the basis of entirely false stock statements and the promoter is being arraigned, then surely a complicit banker will also be pursued, loan guarantee or not.

Not just the government, the RBI also keeps doing what it has been till now. Most recently it has further cut the repo rate by 40 basis point to a historically low 4 per cent and extended the moratorium on repayment till August. The RBI’s stance has prompted Chidambaram to assert, “RBI must bluntly tell government, do your duty and take fiscal measures.”

There are well-known reasons why the government is reluctant to take the fiscal deficit much higher than budgeted. But it is not so well known why the government is reluctant to give cash to the most needy, the hapless migrant worker trudging back home on foot hundreds of kilometres. A seat on a train and some cash in his pocket would go a long way in making him feel that someone cares for him.

Delivery of cash

The Expenditure Secretary has explained that how to give and how much to give to people on the move and whose bank accounts and identities are not known are issues. If not transferred to a bank account, cash is notoriously susceptible to being used up by the wrong people.

But politicians can think out of the box. Most of the returning workers have Aadhaar identities. This can be used to start bank accounts for them at common service centres in maybe an hour. For those without a recorded identity, a temporary biometric identity can be quickly created, then a bank account on the basis of it opened and a migrant worker can walk out with cash in his pocket within the day. Thereafter, he can be taken off the road and then readied for a train journey back home.

Even when cash is given, as to women’s Jan Dhan accounts, significantly cash is not being withdrawn by around half the recipients. The RBI says private consumption has suffered a precarious decline. This means the poorest people opting to save rather than spend. The income shock they have suffered has made them want to foremost replenish their meagre savings which kept them away from starvation. So they need more cash which will slowly get spent and begin reviving consumption demand.

The writer is a senior journalist

Published on May 28, 2020

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