Calibrating exit and stimulus is our best bet

Was a nationwide lockdown appropriate? How long should the lockdown continue? And how good is the stimulus provided by the authorities?  These are the questions that have been debated in recent weeks. 

The decision to impose a three-week lockdown with effect from March 25 has been broadly welcomed. Countries that chose to delay a lockdown —such as the US, the UK and Singapore — have ended up ruing the decision. India’s decision to stay well ahead of the curve stands out as a bold one. It is understood that a lockdown is not about eradication but containment of spread.  It is intended to prevent a surge in cases that is beyond the capacity of the healthcare system. The economic costs are an inevitable fallout. 

Could the lockdown have been imposed even earlier, after giving due notice and with better planning to address categories such as migrant labour? With the benefit of hindsight, it may seem so. But the escalation in the situation worldwide in the last week  of March, perhaps, left the government with no choice except summary and sweeping action.   

The government has since extended the lockdown up to May 4 with some relaxations. Was it right in doing so?  The question was substantially answered by chief ministers of states  ruled by opposition parties— Maharashtra, Punjab, Odisha and Delhi,  to name a few. All are said to have favoured a two-week extension of the lockdown. If a nationwide extension is heartless, then the political consensus is on the side of heartlessness. 

There is a view that an extension is not warranted. It suffices to lock down areas with incidence of coronavirus. In the remaining areas, normal activity may resume.  Yes, we can make daily life a little easier for the people in such areas. But we should be clear that only a modest boost to economic activity is possible. 

Services that are strictly local in nature — doctors, tailors, restaurants, saloons, etc — could easily resume. However, most other business activity within a district requires links with areas outside the district. This calls for movement of people into and from a given district.  Preventing contagion, however, means that entry and exit will have to be severely restricted. This is bound to curtail economic activity substantially. 

Turn now to the measures taken to mitigate the economic impact of the lockdown. The government and the Reserve Bank of India (RBI) have both announced measures. The government’s stimulus package amounts to Rs 1.7 trillion, or 0.8 per cent of gross domestic product (GDP). It is closer to 0.5 per cent of GDP if one excludes elements present in the Budget for 2020-21. 

The measures relate mostly to making extra food available to an estimated 800 million people, and addressing the cash or income requirements of sections such as farmers, farm workers, women covered by the Jan Dhan Yojana scheme and the organised sector workers. Many of these measures will be operative for three months. The stimulus package is aimed at mitigating the distress of those who are most vulnerable. It does not address the impact of the lockdown on businesses. 

Even with the limited stimulus, analysts estimate that  the  Centre’s fiscal deficit  will rise to 5-6 per cent of GDP after factoring in  weaker growth, lower tax collections and a setback to disinvestment. Doesn’t matter, say some economists. We should opt for a stimulus of at least 2 per cent of GDP.  Such a stimulus is imperative to shore up a faltering economy. The rating agencies will understand. 

Well, the agencies may understand the compulsions but they will not flinch from effecting a downgrade if the parameters so warrant.  A rating downgrade will exacerbate the flight of foreign funds. The better course may be to focus on an exit from the lockdown from May 4 and to take a call thereafter based on a careful assessment of what is required on the ground. For now, the government’s priority must be to release funds due to the states and permit them additional market borrowings. 

The RBI, for its part, has cut the repo rate by 75 basis points. It has also taken measures to infuse liquidity into the system, allowed a three-month moratorium on term loans, deferred payment of interest on working capital by three months and delayed the last round of increase in the capital conversion buffer of banks by six months. Some of these measures are intended to get banks to lend more. 

Banks will be willing to lend more to existing clients whose creditworthiness they judge to be satisfactory. However, in the present environment, they are unlikely to favour exposures to new clients, least of all small and medium enterprises (SMEs). Some would like the RBI to lend directly to businesses by subscribing to corporate bonds. Corporations that can issue investment grade bonds are not the ones most in need of help today. The ones that need help are SMEs. Neither banks nor the RBI can provide them help of the sort they are looking for. Only the central government can. 

 
In the US, the federal government has announced a Payroll Protection Programme (PPP). Under PPP, the government guarantees loans made by banks to small businesses towards payroll and other costs. In India, the government’s relief for small businesses is confined to covering provident fund payments of both employer and employee subject to stringent criteria. 

The government could do more once the present fog lifts. It should be understood, however, that fiscal stimulus right now is about mitigating distress arising from the pandemic. It is not about waging war on poverty or rescuing businesses otherwise in trouble. The government’s preferred course of calibrating the exit and the stimulus seems our best bet. 

 
The writer is a professor at IIM Ahmedabad


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