The Relief Package
On March 26, the government announced a series of measures to provide relief from the lock-down to the marginalized in society. The key measures proposed were the following:
1. 80 crore poor people will receive additional 5 kg of grains and 1 kg of pulses per family, per month for the next three months.
2. 8 crore poor families will receive 1 LPG cylinder free over the next three months.
3. 20 crore women Jan Dhan account holders will receive Rs. 500 per month for the next three months.
4. 3 crore poor senior citizens, widows and disabled would receive Rs. 1000.
5. 13.62 crore would benefit from an increase in the wage rate under MNREGA by Rs. 20 to Rs 202 per day.
6. 8.7 crore farmers will receive the planned disbursal of Rs. 2,000 in the first week of April.
7. 2.2 million health workers will be provided insurance cover of Rs. 50 lakh per person.
The government claimed that the relief package amounted to Rs. 1.7 lakh crore. However, as some of the payments were any way budgeted earlier, those cannot be regarded as expenses in response to COVID-19. Without accounting for the insurance payment, the expected injection of additional benefits is about Rs. 1 lakh crore, with free grains and pulses accounting for almost 50% of the total amount. The targeting of the proposals is correct, and implemented properly, the marginalized would indeed benefit from the expenditure. However, much more needs to be done by the government.
The Size of Fiscal Support
The size of the relief package announced is clearly inadequate to deal with the crisis. A quick comparison with what is being done by a large democratic country, USA, provides a good point of reference. For 2019, the fiscal deficit of USA was about $ 1 trillion, approximately 4.5% of its GDP. Last week, the lawmakers approved $ 2 trillion additional spending, thereby pushing the fiscal deficit for 2020 beyond 10%. This was just the first tranche of the eventual relief package that is expected to be deployed. The EU too is discussing large scale government intervention to deal with the damage to the economy from COVID-19. The message to the world is clear – fear of large fiscal deficit must not constrain government’s response to the unprecedented situation.
What is the situation in India? The projected fiscal deficit for 2020-21, per the budget, is about Rs. 8 lakh crore, which is 3.54% of the projected GDP of Rs. 225 lakh crore. Accounting for the various ways the deficit is sought to be understated, the actual deficit would probably be closer to 5-5.5% of GDP. The package of additional expenditure of Rs. 1 lakh crore, would add another 0.45%, taking the deficit to between 5.5-6% of the projected GDP. However, the GDP itself is likely to be much lower than the projected figure. Assuming zero growth, the GDP for 2020-21 will be about Rs. 205 lakh crore, the same as for 2019-20. If we let the deficit slide to the US level of 10%, the government could spend about Rs. 8 lakh crore to fight COVID-19.
The above figure needs to be moderated as several budgeted revenue streams are likely to prove overstated. The actual tax revenue is likely to fall short of the projected figure of Rs. 16.36 lakh crore. The projected inflow from disinvestment of over Rs. 1 lakh crore is also unlikely to be realized. Allowing for a shortfall of about Rs. 2 lakh crore in inflows, the additional amount that the government could spend to deal with COVID-19 would be about Rs. 6 lakh crore. Of this, Rs. 1 lakh crore is already committed to the relief package announced. How should the balance Rs. 5 lakh crore be spent by the government?
Allocation of Fiscal Support
The action plan must be based on a few general principles: a) the expenditure has to be front ended, b) the criteria for providing help should be generously framed to ensure that help reaches all who need help, including the undocumented residents in the country, c) wherever possible government spending should be the catalyst to attract funding from other sources. The fiscal support should be allocated as follows:
Survival of Documented Residents: The relief package already announced by the government should be extended by another three months. This would require another Rs. 1 lakh crore of additional expenditure.
Survival of Undocumented Residents: The best equipped to reach this segment of people are the NGOs. The government should allocate Rs. 0.50 lakh crore to supplement the resources of NGOs with credible record of working with such people to ensure that help reaches this segment.
Survival of MSMEs: It is estimated that there are over 50 million active MSMEs in the country. They reportedly provide employment to over 150 million people. They are the most negatively impacted businesses during economic downturns as revenues decline and payment cycles lengthen. The government should allocate Rs. 2 lakh crore for interest subvention and loan guarantees and ask the banks and other lenders to provide medium-term (18-24 months) loans to this segment at low interest rates, with moratorium on re-payments of 6 months.
Support to States: The central government has exhorted the state governments to play an active part in dealing with the scourge of COVID-19. The state governments are stretched on funds and resources as some of the legitimate dues have not been paid to the states by the centre. In addition to clearing these dues immediately, the government should set aside the balance (out of Rs. 5 lakh crore) Rs. 1.5 lakh crore to provide matching amount to fund state government schemes to help the marginalized in the state. Care should be taken to ensure that the funds are used as equitably as possible across states, free from political considerations.
Additional Fiscal Support
It is unclear how long the scourge of COVID-19 would last. The economic recovery would take much longer. The government should therefore prepare a blueprint for action for spending another Rs. 6 lakh crore in the second half of fiscal 2020-21. It is difficult to foresee whether this package would be targeted at survival or at recovery. If targeted at the latter, the package should be directed at helping industries that have the highest linkages to demand for intermediate goods and provide employment to large numbers. The sectors that would qualify for such support would include the infra sector, the real estate sector, and the hospitality sector.
It is quite clear that the assumptions underlying the budget for FY 2020-21 have gone completely awry. The numbers must be re-worked, with transparency and boldness, rather than attempting to hide deficits and expenditures on survival of people and bail-out of businesses. There is a case for framing a revised budget, getting it passed through the parliament, and letting the world know what we plan to do to deal with the economic fallout from COVID-19.