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The economics of survival – Cover Story News


To combat the COVID-19 pandemic, the Indian government has imposed an unprecedented three-week national lockdown. While travel and tourism, aviation, hospitality and entertainment will be the worst-hit, sectors such as automotives, which had already been struggling, will see a further collapse. Over 300 million Indians, who are either casual labourers or work in the unorganised sector, will face employment challenges. Stock markets too have tanked, on March 23, the BSE Sensex suffered its worst-ever single-day fall, plunging 3,934 points to 25,981.24. India Today spoke to economists and experts across industries to identify the areas of pain and the possible remedies. On March 19, Prime Minister Narendra Modi had said that the government had set up a task force to assess the pain in the economy and come up with a financial package.

On March 26, finance minister Nirmala Sitharaman announced a relief package of Rs 1.7 lakh crore to help the poor. The PM Garib Kalyan Yojana will essentially use direct cash transfers to ensure food security for those affected by the three-week shutdown. This includes an insurance scheme of Rs 50 lakh per person for frontline workers in the fight against COVID-19, an additional 5 kg of rice and 1 kg of dal free for three months for 800 million beneficiaries of the PM Garib Kalyan Anna Yojana, giving farmers under the PM Kisan scheme the first instalment of Rs 2,000 in the first week of April, benefitting about 86.9 million farmers, increasing MNREGA wages from Rs 182 to Rs 202 leading to a Rs 2,000 increase benefitting 50 million people, an additional ex gratia amount of Rs 1,000 for the next three months for the elderly and an ex gratia payment of Rs 500 per month for the next three months for 200 million women beneficiaries.

This is in addition to the measures announced on March 24, when the last date for filing belated income tax returns for FY19 as well as the deadline for filing GST (goods and services tax) returns for March, April and May this year was extended to June 30, 2020. The threshold for default under the Insolvency & Bankruptcy Code (IBC) has been raised from Rs 1 lakh to Rs 1 crore and the government is considering suspending Sections 7, 9 and 10 of the IBC for six months to prevent otherwise healthy companies from being forced into insolvency proceedings. Other steps include waiving charges on non-maintenance of minimum balances in bank accounts for three months and making ATM withdrawals free for the next three months.

How will the government fund the extraordinary expense of a stimulus? One option is for the Reserve Bank of India (RBI) to buy government bonds, the RBI is empowered to do so under the national calamity clause of the Fiscal Responsibility and Budget Management Act. The government also has the option of utilising its windfall from the crash in crude oil prices in recent months. (The global oil price fell to a low of $25 a barrel last week, from more than $65 at the start of the year, and remains below $30 a barrel. India’s oil import bill is expected to fall by more than 10 per cent in FY20. India spent $111.9 billion on oil imports in 2018-19.) It could also consider borrowing. Another way is through cutting expenses. A Mumbai-based investor estimates that government salaries have gone up by $140 billion (Rs 10.6 lakh crore) in the past five years. If government salaries are docked by 10 per cent, that, along with the benefit of lower oil prices, gives a benefit of about two per cent of GDP, he says. The RBI could also consider an asset-recovery programme, similar to those carried out by other countries in the wake of other financial crises. In the US, one such, the Troubled Asset Relief Programme, which purchased toxic assets and equity from financial institutions to protect their balance sheets, paid the costs that the US government incurred in the subprime crisis of 2007-2010. But these measures require conviction, says a member of the prime minister’s economic advisory council. There could be losses, which makes matters difficult because the political class in India will find it difficult to develop a consensus to accept losses.

India Inc, on its part, is expecting much more than what has been promised so far. Firms from nearly every sector of the economy are seeking support from the government. Some hope for grants, while others look for cheaper loans, tax cuts or deferment of taxes, as well as flexibility for banks to reschedule payment terms. Overall, they are seeking the following measures:

Administer a fiscal stimulus for business

In addition to the welfare measures announced on March 26, some estimate that the Indian economy needs a fiscal stimulus of about 1 per cent of GDP, or about Rs 2 lakh crore. At the same time, the fiscal and monetary policy response must be coordinated. So far, the policy response has been muted, but with India now locked down, a recovery plan is needed, fast. A fiscal stimulus will help industry get over the crisis as well as spur consumer demand, says the Confederation of Indian Industry. It has also suggested removing long-term capital gains tax of 10 per cent and fixing the total dividend tax at 25 per cent.

Reduce banks’ cost of funds

Some sectors of the Indian industry also want the RBI to reduce the repo rate (the interest rate at which it lends to commercial banks) by 50 basis points (0.5 per cent), along with a 50 basis point reduction in the cash reserve ratio (the percentage of deposits banks have to hold as reserves) to ensure sufficient liquidity and cheap funds. D.K. Joshi, chief economist with Crisil, says the repo rate can be cut by 50-75 basis points without fuelling inflation. With the sharp reduction in crude oil prices and the destruction of demand, consumer price inflation (CPI) is unlikely be a worry in the near term, he says. We see CPI inflation manageable at 4.4 per cent in fiscal 2020-21. Others want the central bank to reduce interest rates by much more, between 200 and 250 basis points. Policy-watchers say that the RBI should do this right away to signal that it is attuned to the situation on ground. Banks have nearly Rs 3 lakh crore of liquidity, but that money is not flowing into the system, the RBI needs to nudge banks to lend and also ensure markets remain stable. India, being the fifth largest economy in the world, cannot be found lagging in taking timely rectifying action. The time is ripe for the RBI to roll out a monetary stimulus to protect businesses from going bankrupt, says Niranjan Hiranandani, president of Assocham. He also suggests that rating agencies be asked not to downgrade ratings for a while until the situation has stabilised.

COME BACK LATER. Markets across the country are closed, and even essential supplies are disrupted. Photo by Yasir Iqbal

Cut auto companies some slack

Some have asked for the date for automotive players to liquidate their BS-IV inventories to be pushed past March 31. This sector is facing an especially severe challenge, sales had already fallen over 19 per cent in February compared to a year ago as demand slowed. The coronavirus pandemic has caused sales to plunge even further. Dealerships across the country had seen a 50 per cent drop in sales till last week, and now they have been forced to down shutters. Major manufacturers, including Maruti Suzuki, Mahindra & Mahindra, Mercedes Benz and Hyundai Motors, have closed down their plants. On top of this, new environmental regulations require car-makers and dealers to liquidate their BS-IV inventories by March 31 and shift to the BS-VI regime from April 1. However, with sales lost to the pandemic, they are saddled with a huge unsold inventory. Crisil predicts that the automobile sector will not recover in fiscal 2021 from the shock.

Ashish Harsharaj Kale, president of the Federation of Automotive Dealers Association, says the organisation is trying to get the Supreme Court to extend the cut-off date. However, if that does not materialise, he wants auto-makers to take back unsold BS-IV inventories from the dealers to reduce the latter’s losses.

Shore up the rupee

On March 23, the dollar-rupee exchange rate breached the Rs 76 mark. Many say that the rupee could devalue beyond Rs 80 per dollar by the end of April. However, Joshi believes this is a short-term phenomenon. At present, India holds about $481 billion in forex reserves. To create further liquidity, it is expected that the RBI will consider a deeper cut in the benchmark lending rate. The monetary policy committee is expected to meet on April 3 to take a decision.

The rupee’s depreciation accelerated in mid-March after developed countries cut their respective benchmark lending rates. The US Federal Reserve brought it to zero, while the Bank of England brought it to 0.1 per cent. In March, the value of currency in emerging economies like Brazil, Argentina, South Africa, Indonesia and even Singapore depreciated, investors across the globe are dumping risky assets’ as a result of the pandemic. In the first three months of this year, foreign funds have withdrawn $11 billion invested in equity and debt. Most countries appear to be shutting themselves off from international trade, with exports coming to a gradual, grinding halt. These factors are hitting the currency in the short term. But since our banks are sufficiently capitalised, since we have enough forex reserves and since crude oil is trading below $31 a barrel, the slide can be resisted, says a top official in the ministry of finance.

Cool the bourses

For over a fortnight, Indian stock markets have been in free fall. On March 23 alone, investors lost Rs 14.23 lakh crore when the Sensex took a historic dive. The RBI should use all possible measures to calm the markets, in this, there is a template for the central bank to follow. The US Federal Reserve is intervening in the bond market by buying $500 billion worth of bonds, and $200 billion of mortgage-backed securities. The Bank of England and the Bank of Korea have followed a similar trajectory.

Provide income support

The government needs to actively address the income crunch millions of Indians are likely to suffer. Providing income support to middle- and low-income groups could help significantly in ensuring that consumption doesn’t suffer. This could help as much as 70 per cent of India’s 100 million salaried employees, those employed in the unorganised sector, working without a formal contract, such as domestic employees in urban homes. However, a major challenge is the absence of a database to identify potential beneficiaries. Policy-watchers recommend that the government use inclusion criteria’ for this, for instance, those who have Jan Dhan accounts. (The flip side is that while most Jan Dhan account holders are in rural areas the pandemic currently appears to be centred on urban areas.)

Defer IBC action

Though the government has already provided support to some troubled firms on March 24, many have suggested that proceedings under the IBC be suspended for a short period, especially for firms in sectors like aviation and hospitality. The financial stress these firms are currently experiencing does not reflect a true weakness in their businesses, the coronavirus pandemic is, after all, a black swan event. The financial losses it has imposed could not have been predicted. Many small businesses worry that they will be classified as defaulters as their cash flows dry up and loan repayment deadlines are missed.

Relax the fiscal deficit target

The government needs to support the incomes and cash flows of vulnerable citizens and businesses. This can be done through direct benefit transfers and employment-generating schemes like MNREGA, however, to allow this expenditure, the government will have to relax its fiscal deficit target by at least 1 per cent of GDP.

Consider tax breaks for travel & tourism

Rajesh Mudgill, secretary of the Indian Association of Tour Operators, says this is the worst business environment he has ever seen. Hotels are running at occupancy rates of less than 20 per cent. The social distancing measures continue to severely impact airlines, hotels, malls, multiplexes, restaurants and retailers. Declines in business volume and sub-optimal operating efficiencies will impact cash flows of companies in these sectors. The association estimates that the industry could suffer losses of Rs 8,500 crore, at the very least. To mitigate this, the government could consider waiving GST dues for a period or reduce rates for the next financial year. Policy experts say that tax cuts or deferred payments could be the best options for sustained support. The pandemic has played havoc with the industry, says Hari Sukumar, vice president at Jaypee Palace Hotel in Agra. We have had huge losses and are very far from a recovery. We need massive support from the government. As an industry, we need GST payment deferments and also support with utility payments. A huge chunk of our monthly expenses goes to energy bills.

Give soft loans to gems & jewellery players

Mired by challenges in fund-raising and the crisis in key markets such as Hong Kong, companies in this sector have been in significant credit distress over the past two fiscals. The situation has become worse since January, especially for diamond exporters, because of the slowdown following the pandemic. Anup Bohra, owner of Jewels Emporium in Jaipur, says the government must ask banks to give soft loans and defer repayments or interest on existing loans and remove import duty on gold to reduce the impact of soaring prices. That is the only way we can hope to retain employees, he says. I do not see a revival in the next six months.

Extend tax incentives to textiles

Readymade garment makers dependent on exports are facing intense competition. With key markets such as the US and the EU facing headwinds, there could be significant demand pressure for exporters, including cotton yarn exporters, says Crisil. Already, the business performance of the latter sector has been impacted in the fourth quarter of FY20 because of disruption in supplies to China, which accounts for a quarter of such business. Social distancing could also weaken demand for apparel. The Confederation of Indian Textile Industry has requested the government to reduce interest rates on loans, and asked for a moratorium on repayment for four quarters. It has also asked for raw materials to be exempt from anti-dumping and basic customs duties.

Give MSMEs credit

On March 23, the Punjab government ordered full curfew in the state. For Onkar Singh Pahwa, chairman of Avon cycles, this is a nightmare, he has had to not only shut his factory in Ludhiana, but clear inventories as well. This issue impacted both business and administration. Punjab alone has to refund Rs 310 crore worth of value-added tax dues (prior to GST) of industries in the state. Rahul Ahuja, managing director of Ludhiana-based Rajnish Industries, an auto parts-maker, says: There are small things which the state can do, like waiving fixed cost on electricity during the lockdown, expediting payments by their own PSUs, or clearing up pending claims and disputes with the industries. A number of MSMEs from Punjab, Haryana and Uttar Pradesh have asked the finance ministry to allow them to retain GST charged from the suppliers, and for provisions to be introduced to make part payments monthly. This will allow us to maintain our cash flows, says Ahuja.

Many have also asked for the government to share the salary burden of businesses during the shutdown, asking for half the cost of worker salaries to be subsidised, along with provident fund contributions (both for employers and workers). Meanwhile, Punjab chief minister Amarinder Singh has asked the Union government to extend the financial year from March 31 to April.

Address farm sector’s delivery/ harvest worries

A major worry for both the central and state governments is to maintain the supply of food and essential items through the lockdown. Although they have been exempted from the production ban brought on by the lockdown, farmers are facing severe issues in transporting their produce to local mandis. Truck drivers are not ready to transport produce at even double the fare, says Gurpreet Singh, one of the major transporters of vegetables in the Sangrur area of Punjab. However, state administrations are in talks with transport unions to not only increase frequency of deliveries, but also to avoid charging exorbitant rates to do so.

Further exacerbating the problem is that from April 1, the harvest season will start across the country for the rabi crop. This usually involves migrant labour that come from various parts of eastern UP, Bihar and Jharkhand. However, as a result of the national lockdown, and the curfew in many states, the movement of labour has stopped, jeopardising the harvest.

The Ram Vilas Paswan-led food procurement ministry, for the past two years, has been engaged in digitising the procurement and disbursal mechanism. A top official from the ministry says that officials are working with their counterparts in the state government to do monthly surveys of the crop before deciding on a date on which farmers need to transport their harvests to local mandis. They are also working with state agencies to resolve the problem of harvest and transportation. This will require quicker payment for harvests, and permissions for farm labour to be brought under MNREGA, where the government pays for the labour cost and efficient procurement.

On March 23, finance minister Sitharaman had allowed state governments to take food grains on three months’ credit to disburse to the 750 million beneficiaries of the public distribution system (PDS). The big idea at her ministry is to clear the stocks with the Food Corporation of India, which holds a surplus of 436 lakh tonnes, and then go for procurement. The new plan allows PDS stores to double the quota for each family from the current five kg.

With most businesses in dire straits, the clamour for a relief in the form of a further government stimulus is gaining momentum. This needs to come sooner rather than later to prevent an economic catastrophe.

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