When economic activity gets permitted as the lockdown is eased, the need for relief measures for economic revival would be acutely felt. The relief packages in the US and Europe are unprecedented in size. The bigger ones range between 10-20 per cent of GDP. There is a growing consensus that India needs a large package and should not be constrained by concerns about the fiscal deficit.

One concern is how rating agencies would react to a ballooning fiscal deficit. The announcement that as the economy begins to recover, reducing the fiscal deficit would become a priority should help. India should have the confidence to do what it needs to. In the short run, further withdrawal of foreign institutional investors would complete the process of undoing the real exchange rate appreciation of the last decade. By improving the business case for greater value addition, this would help in the recovery.

With the lowering of crude oil prices, depreciation would not be inflationary. Further investments into India would flow more in response to the return of growth rather than what rating agencies may say. The advantage of resisting the temptation to go in for sovereign borrowings becomes quite clear in a situation like this.

Another concern with raising the deficit has been of inducing inflation. But this is a phenomenon of normal times. The high deficit now is needed to get the economy to recover from an unprecedented shock. The risk of high inflation may be far greater if normal production and supply is not restored at the earliest. The relief package needs to be bold and ambitious and drawn up keeping normal concerns regarding the fiscal deficit in temporary abeyance.

Universal cash transfer

Fleshing out a relief package for the Indian economy is more challenging as the situation here is sui generis . One feature of some of the relief packages announced in developed countries has been the payment to firms of 70-90 per cent of the wages of workers to enable retention of workers. Those rendered unemployed are getting unemployment benefits under the existing social safety nets. These have been liberally improved in some countries especially in the US. In India firms are not free to shed regular workers in a period of downturn due to the rigidity of the labour laws.

To get around this all enterprises, including the large firms, have a substantial number of contract workers. Almost all these contract workers have lost their jobs by now. They have no social security benefits. The result has been the massive movement of migrant labour back to their villages. They do not exist in easily accessible records. So directly paying firms to retain their contract workers is not an option, nor is direct payment to their unemployed workers. Only universal cash transfer is feasible. ₹500 and additional one month’s supply of free foodgrains has been given by the Central government. Some States have supplemented it. Free cooked meals are also being provided in places. The case for enhancing this relief substantially in the lockdown period is strong.

Since every enterprise, micro, small, medium and large, has been badly hit, it is difficult to grasp the enormity of the challenge. So many of them may be headed towards bankruptcy. Almost all would be needing relief to be able to survive and recover. This is the reason that the relief packages in the developed economies which are going through a lockdown are so large. They provide to private enterprises a mix of tax breaks, grants, state guarantees for debt, concessional loans, capital infusion and measures for additional liquidity.

The relief of repayment responsibility being kept in abeyance for three months provided by the RBI has only given space for a proper relief package to be put together. The relief package has to be bold enough to restore confidence and animal spirits.

Act in unison

The government, the RBI and the banks, need to act in unison in ways they have never done before. An announcement that till the next financial year, no new cases would be sent for bankruptcy nor would any account be declared a non-performing asset (NPA) by keeping existing circulars and guidelines in abeyance would be bold enough. Then firms need money to meet their other current costs such as electricity bills. So banks need to liberally provide additional working capital with moratorium on repayment till revenues rise sufficiently. Banks would need directions stipulating the multiple of the existing working capital, say two times, that they could freely sanction.

After recovery there may, in most cases, be no alternative to the restructuring of debt with repayment spread over a longer period to make debt servicing feasible. This may also require hair cuts. Clearly, the government would need to pitch in. An interest subsidy by the government for such debt given during the current financial year would be one way for keeping banks healthy. The advantage in this for the government would be that the interest subsidy liability would commence in the next financial year and would be stretched over many years.

The interest subsidy rate required would emerge from the assessment of the viable repayment capacity of the enterprise. As the impact has varied across sectors, a differentiated treatment for different sectors may be necessary. A generous credit guarantee through SIDBI for small and medium enterprises may be the only way forward for them. However, some medium and large enterprises could survive only with infusion of equity capital and could then prosper in the medium term. Some governments in their relief packages have created a fund for this purpose. India would also need such a fund for selective use. The bailout of UTI is a good precedent.

With this, all enterprises could be in a position to respond to demand in the market and get going again. But demand would need to be generated. The relief package should generate additional demand for domestic goods and services that is large enough to kick-start the economy after the lockdown.

The writer is Distinguished Fellow, TERI, and former Secretary, DIPP. The views are personal

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