Roadmap for Recovery of the Economy Post Lockdown - A Whitepaper!

Background & Introduction

What has happened over the last month has been unforeseen; The world economy has gone through the Spanish Flu pandemic in 1918; the Great Depression in 1928; even the sup-prime crisis in 2009 – but this time around it seems to be walking into an unchartered territory. The world economies had already seen enough this year with the US-China trade war; Brexit trade issue & the long recession in Germany – Covid 19 has catapulted it further.  

The Indian government has taken several steps to combat the impact of the Corona Virus to the economy; including a stimulus package of 1.70 lac crores; directed mostly towards the people of the lower and middle income group. The government has to bide the crisis but the humane conditions cannot be disregarded. Covid 19 is exacerbating pre-existing inequality issues across the country, the individuals who have been hit the hardest are the ones who were in the most precarious position to start with.

The Economy and its KPI’s!

An economy is evaluated on the basis of some key performance indicators; GDP; rate of Unemployment; Public Debt and Inflation are some of the important economic indicators. Here is a little dissection of all of them :-

a)     The GDP is considered the most important factor of economic measurement. India ranks 5th globally in terms of Nominal GDP and 3rd in terms of GDP (PPP) – it has been the one of the fastest growing economies over the past decade with a GDP of about 2.94 trillion $ in 2018.

(Data from IMF Economic Outlook 2019)

Assuming the GDP was going to be 3 trillion $ in 365 days of 2020-21 – a loss of 45 days in absolute terms will result in loss of approximately 360 Billion $ i.e. equal to 76% of the total foreign reserves of India. An KPMG April 2020 report even suggested a scenario where the GDP growth might come down to below 3% as against the 6-6.5% targeted earlier by the government. The budget Fiscal deficit set at 3.5% for 20-21 may even breach 6% in this fiscal. 

The Economic Outlook released by IMF on 14th April 2020 underlines the following points:-

• Cumulative global loss has been piped at 9 Trillion $ - That is more than the economies of Japan and India combined. Global contraction of GDP will thus be about 3%
• Global Expansion of 5.8% in 2021 will be strongest since 1980
• Advanced economies will Shrink 6% while emerging economies will shrink 1%.
• While most economies will have de-growth China is expected to grow at 1.2% and India at 1.9%.

b)     India doesn’t have a mechanism/agency to measure the Unemployment Rate but as per some reports available on the web and from the reports of the International Labour Organisation America’s & China’s unemployment rate was 3.5% - 4% in 2019. India’s unemployment reached 6.1% post demonetisation in 2016 and should be around 4% currently. The unemployment rate is US reached 9.5% in 2010 after the subprime crisis and it didn’t fall below 5% until 2016. So a 9-12 month recession will take India several steps back as regards to the Unemployment rate which might even hit 9%.

c)    Consumer Price Inflation in India was expected to be at 4% in the year 2020 as per the forecast of the IMF in March 2020. But it’s set to go lower during recession and spurt during recovery of the economy. The government will have to keep inflationary trends in check as mild inflation promotes economic growth while runaway inflation obstructs the growth; as cost rises. As per the Federal Reserve an inflation rate of 2% is acceptable.

d)     Public Debt is the sum of the internal and external debt of a nation. India’s total debt in 2019 as per Wikipedia is 2.1 Trillion $. While emerging economies have an average ratio of 55.7% Public debt to the GDP – India stands at an already exorbitant 68.5%.  

(Data from IMF Economic Outlook 2019)

Impact on Businesses and the Challenges

This more or less is likely to be a ‘U’ or even an ‘L’ Shape recession but the chances of this being a ‘V’ shaped recession look dim – the recovery will thus take a long time. In times of recession consumers engage in aversion behaviour. Social distancing & avoidance of large public gatherings will sharply curtail consumption; thus hampering quick recovery. 

(Data compiled from Wikipedia)

As can be seen from the above that while agriculture contributes just 15% of the GDP it employs 44% & Services employ just 31% labour but contribute 60% to the GDP. It is thus imperative for the government to protect all the sectors of the economy.

The challenges are different for all the sectors – while the logistics/Supply chain management and procurement of raw materials will be the major challenges for the Agriculture sector; Absorption of Overheads, liquidity crunch, slump in demand will be the issues for the Industries; Closure of export markets, statutory compliances, staff retention will be the issues for the Services Sector. The government thus will have to address the issues based on the analysis of the monetary impact on each of these sectors separately.

Steps for the Revival!

The government will have to undertake several Micro as well as Macro- economic measures to counter the impact of pandemic on the economy.

Expansionary Monetary Policy:-

An expansionary monetary policy is executed when there is a major recessionary trend. It involves substantially increasing the liquidity supply in the economy by whichever way possible, that even includes printing of excess currency. With the increase in supply; there is reduction in the interest rates both of which lead to increase in demand from consumers and increase in production; thereby leading to a quick trajectory of growth. It was successfully applied by the USA and the European economies to combat the Great Depression of 1928.

Measures to be taken across Sectors:-

Most of the measures are targeted towards easing the liquidity crunch in the economy and compliance pressures on the enterprises.

• A Sector specific task force should be formed directly under the Finance Ministry with experts from various expertise & capabilities to manage the response to the crisis.
• Release of payments against government Infrastructure contracts.
• Recapitalisation of banks and relaxation of credit norms to help ease liquidity in the economy.
• NPA classification norms should be extended from the current 90 days to 150/180 days. A onetime loan restructuring window can also be given to the banks.
• Reduction of interest rates, banks should allow excess 20-25% credit for working capital to all business enterprises over the next quarter.
• Inspections/Physical Audits by regulatory authorities like the MPCB, Excise etc shall be suspended for the time being. Licenses for other compliances that may have/may expire in the immediate future shall be granted an automatic renewal for a period of 6 months.
• Reduction in Export duties – promoting trade with neighbouring countries.
• Direct benefit transfers to daily wage earners
• Fake news propaganda harming certain sectors like the poultry shall be quickly acted upon.
• Some Taxation Measures can also be taken to leave more money with the consumers

1. Reversal of Taxation of Dividends and Long Term Capital Gains will help revival of the Stock Markets which has lost more than 22% of the index value over the past couple of months
2. Deduction for Interest in Income tax on consumer financing loans will help revive consumer demand.
3. Deferment of Tax Audit; Return Filing compliance dates.
4. Deferring payment of Advance taxes for the 1st Quarter of 2020-21
5. Deferring payment of GST for the 1st Quarter of 2020-21
6. Release of long pending undisputed Income Tax/GST refunds for Individuals and Enterprises.

In addition to the above in general; the following sector specific steps shall be taken in addition by the government.

Agriculture:-

India being agrarian economy with maximum labour workforce this sector shall be insulated from external damage; doing so is important not only for economic interests of people involved but also to keep in check the inflationary trends and the food security of the nation.

• Agricultural Inputs for the upcoming Kharif season shall be made available free of cost or at subsidized rates.
• Effective management of Supply Chain/Logistics – subsidized transport will help farmers save costs and reap benefits
• Funds for Crop Insurances, Subsidy Transfers shall be initiated as soon as possible.
• Easing of agricultural credit norms.

Industries:-

The high fixed overheads have been at the forefront of the industrial issues, the following are the some of the specific steps that government can undertake to ease industrial pressure

• Large companies with good cash reserves should be compelled to release payments to MSME’s via bill discounting mechanisms to fuel liquidity.
• Government shall subsidize the cost of electricity over the next 3 months
• Free Railway/Bus travel to the workplaces/factories of Migrant labours shall be provided by the government. This will help reduce unemployment and quick labour retention.
• Government shall subsidize wages, PPF & Esic contributions for MSME’s
• Reduction in cost of fuel will help reduce transport costs

Services:-

Services is the largest contributor to the Indian economy – protecting the interest of this sector shall be of utmost priority.

• Government hall give complete tax holidays for sectors like Aviation, Hospitality, Entertainment, Tourism which have been massively affected.
• Automatic renewal of policies shall be given for sectors like Insurance pending premium payments with a grace period.
• Accelerated approvals for new banking/insurance/investment products introduced to combat the current state of the economy.
• Promotion of Digital payments.

While there have been scraps of epidemiological wisdom, biting the bullet isn’t easy. Populist moves are difficult in India which is already reeling under a budget deficit. Beating it down further will lead to a ratings downgrade, loss of investor confidence, increase in borrowing costs & huge losses for financial institutions. Countries like the USA or the European countries can spend 10% or more of the GDP without worrying about a ratings downgrade.

Balancing the saw with revenues is thus important for India.

Sources of Funds!

i)       The falling prices of crude have helped government with gains of more than 400 billion INR over the past few months. If the crude prices continue to remain the same the government is in for a huge bonus.

ii)     All the tax measures to be undertaken shall be ‘Deferred’ and not exempted; putting the government just in line to reach its targets by the end of the Fiscal.

iii)   Short term increase in public debt till the revival of the economy can be a solution as India has a debt to GDP ratio of 68.5% while the same is 233% for Japan, 103% for the US and 99% for France.

iv)   Budgeted Public expenditure for sectors like Defence, Smart Cities, Space Explorations shall be reallocated to revival of the economy; as more people in India might die of hunger and poverty than in a war.

v)     Profitable public sector companies like ONGC, LIC, BHEL etc can allow a discount on their services to assist government in revival of the economy.

vi)   Aggressively pursuing the divestment targets for the fiscal.

vii) Regulatory tweaking will help building the long pending dream of a Domestic Bond Market. Banks/Insurance Companies shall be encouraged to issue investment grade bonds which the RBI should agree to fund. The same was also suggested by Raghuram Rajan in a TOI article.

While India is still a small portion of the Global economy; but if we are looking at 'Hope' it a good place to start with. The young non-dependent population of India will sooner or later surely embark on the journey of making India a 5 Trillion $ economy. With every crisis comes an opportunity and amid mathematical calculations & economic projections there is always something called Human Optimism.

15th April 2020