Economic development is indicated by growth in the aggregate output of economic activities. Covid-19 is only a recent disruptive element. Even prior to that, there were recessionary trends troubling the economy. Ever since 2015, we have seen disruptive instruments such as demonetisation that removed cash circulation, GST that created working capital crunches and input-output tax rate mismatches, attack on non-performing assets (NPAs), attack on credit culture, and introduction of the Insolvency and Bankruptcy Code (IBC).

Economic scenario outlook

As per the report released by the IMF on April 14, 2020, as quoted by RBI Governor in his speech of April 17, 2020, India is among the handful of countries that is projected to cling on tenuously to positive growth (at 1.9 per cent). In fact, this is the highest growth rate among the G20 economies. In order to achieve even such a growth, we need capital infusion.

The contraction is expected to be very high as growth prospects appear to be bleak in view uncertainties arising from Covid. The IHS Markit India Manufacturing Purchasing Managers’ Index (PMI) declined to 51.8 in March from 54.5 in February 2020. Today, it would have declined way below 50, the mid-mark indicating a deepening of the contraction.

The State Bank of India’s report of April 16 projects net tax revenue will have a shortfall of at least around ₹4.12 lakh crore, and revenue shortfall for States will be ₹1.32 lakh crore. While we appreciate the measures introduced by the RBI to improve liquidity and to augment credit flow to induce growth. The Targeted Long Term Repo Operations and infusion of funds to meet the needs of sector-specific financial institutions such as NABARD, SIDBI and NHB, these measures are not going to remove the factors responsible for economic slowdown.

Baby steps are not enough

The Government of India had announced a package to put money in the hands of thousands of people who are starving and who were daily-wage earners. A discussion with several MSME owners shows that mostly their demands are confined to waiver of interest for the three-month moratorium; grant of subsidies and soft loans for meeting working capital crunch; waiver of payment of utility bills; speeding of payment of dues from government and some such concessions. Most of the demands hovered around liquidity issue and receivables management.

The SBI report says the income loss per day of 37.3 core workers due to lockdown is around ₹10,000 crore, which means a loss of ₹4.05 lakh crore for the entire lockdown period. For casual labourers, this income loss is at least ₹1 lakh crore. The SBI report says any fiscal package should at least strive to make up for the income loss of ₹4 lakh crore, which is roughly 2 per cent of the GDP.

The measures unleashed by the government and the RBI are not sufficient to be termed as economic stimulus package. They are intended to put money into the pockets of the workers and farmers suffering from job losses and to create liquidity in the kitty of banks and financial institutions and making available money to induce credit growth and lower rates of interest. When credit demand is insignificant and falling, increasing liquidity is not expected to yield dramatic results.

Need for stimulus

To drive economic growth, the country needs an economic stimulus package. The government may think about announcing a capital infusion plan. It should be sizeable enough to stimulate. It may be of the order of about 20 per cent of the net tax revenues of the Central government (after removing the share of States). If the government gets ₹15 lakh crore, about ₹3 lakh crore could be earmarked for capital infusion plans.

In the Budget presented in 2020, there are about five ministries that are getting allocated more than ₹1 lakh crore, of which, defence alone gets ₹4.71 lakh crore. Creative thinking could bring ways and means to accommodate the capital infusion plan. The government must think “out of the box”. It is not wrong to blend a communist mind with a capitalist zeal.

Action 1 : With data from income-tax and GST returns, the government can prepare a list of manufacturers, importers, exporters and service providers, who are operating their units efficiently. More weight could be assigned to data from income-tax returns as it is an indicator of profits.

Based on inputs obtained from these sources, capital infusion by way of soft loans for advance funding losses expected to be incurred by enterprises in the current financial year due to economic slowdown could be announced so that they continue to operate without getting hit by operational losses. When there is a discussion about movement of production facilities from China to India, the government must come to the aid of efficient enterprises.

Action 2 : There will be hundreds and hundreds of entrepreneurs who will be able to bring to the table new projects and proposals, if the government induces captial. For viable new projects, funds could come through normal banking channels so as to use the liquidity created in the banking sector for credit growth. Government could support them with tax holidays.

Action 3 : The government also must make investments. It must step up investments across the country in the public-private partnership mode. The government can do a lot of projects in various States particularly in Jammu and Kashmir and the North-Eastern States. Covid-19 has exposed our country’s woefully inadequate health infrastructure. The government must invest huge amounts to help create world-class medical facilities and also ensure that healthcare receives higher allocation in the Budget.

The writer is a practising Company Secretary and Independent Director, Karur Vysya Bank Limited

comment COMMENT NOW