As the COVID-19 pandemic wrecks havoc across the globe, one of its victims will be the global economy.
In India, small businesses with weak revenues are already struggling with cash flows, while daily-wage earners are starting to see even their meagre income impacted by partial shutdowns. Specific sectors like tourism, entertainment and aviation are starting to bleed.
So far, the economic response to this has been led by state governments, from Kerala to Uttar Pradesh. In an interview to The Wire, R Ramakumar, economics professor at the Tata Institute of Social Sciences, says that the current situation calls for a carefully designed package uncontaminated by notions of fiscal conservatism.
Ramakumar is also a member of Kerala’s planning board, which provided inputs for the recent Rs 20,000 crore revival plan announced by the state government.
Edited excerpts of the interview follow:
State finance minister Thomas Isaac says much of Kerala’s economic package comes from front-loading borrowing and spending more up front. Can you explain how this works and whether it is something that all states can follow, even those with weak finances?
Kerala’s economic package to address the coronavirus-induced slowdown is primarily counter-cyclical. Its first assumption is that the economic slowdown will be extremely harsh over the next three to six months. This is the period when government action has to actively intervene. So, what Kerala will do is to spend substantially higher – double or triple, depending on the sectors – during the next three months than what it would have spent during the same period in a normal year. The Chief Minister and Finance Minister have clarified this point.
During a normal year, Kerala has the capacity to borrow Rs 24,878 crore during financial year 2020-21. Kerala will request the central government to allow it to borrow – via bonds – roughly one-half of this debt, i.e., Rs 12,500 crore, in April 2020 itself. This will be a major source of the Rs 20,000 crore package the government has announced. That’s what front-loading means. The state cannot borrow more than what the Centre allows as per the FRBM Act. So, it can’t spend additional amounts freely. What the state is doing is to confront the immediate slowdown with an upfront spending plan.
Where will the Rs 20,000 crore be spent? The rough disaggregation works out like this. Two months welfare pensions will be paid in advance to the pension-beneficiaries. For those not eligible for welfare pensions, Rs 1,320 crore has been set aside for providing an assistance of Rs 1,000 per family.
Another Rs 100 crore has been set aside for providing free food grains to families in need, while Rs 50 crore has been set aside for provision of subsidised meals at Rs 20 per meal.
Rs 500 crore has been set aside for a comprehensive health package, where focus will be on improving public health infrastructure and equip the state to face such epidemics. Loans worth Rs 2,000 crore will be distributed through the Kudumbashree Mission to female SHGs. Rs 2,000 crore has been set aside for the expansion of the employment guarantee programme.
Rs 14,000 crore has been set aside to clear all the arrears of the state government till April 2020; this will not be payments to contractors, for whom there will be a separate discounted route of payment. This will largely be pension arrears, welfare assistance to informal workers, bill payments of panchayats, scholarships for students and so on.
Autos and taxis have been given relaxation on payment of fitness charges. Passenger vehicles have also been given tax relief. There is relaxation in the deadlines of water and electricity bill payment for affected firms. Entertainment taxes for cinema halls have been reduced.
So you can see that the package has people at the centre, and sectors acutely affected by the slowdown, such as transport and entertainment.
If the state is front-loading its spending, what happens in the later parts of the fiscal year? The fiscal deficit strings will have to be loosened eventually?
This is where the state is banking on a second assumption. It estimates that the Centre will be forced by circumstances to discard the FRBM limits for borrowing to address the crisis.
If the limits for the Centre are raised, it will have to raise it for state governments also. Thus, additional borrowing may become possible in the second half of the year. This amount can be utilised to meet the financial needs of the second half of the financial year 2020-21. It’s a realistic assumption.
What should be done specifically for certain industries that have been hit the hardest so far — tourism, entertainment, services?
This is where the Centre has to be proactive in announcing a comprehensive revival package in the economy. I must say, other State governments should follow what Kerala has done. State governments can give tax relief to sectors that are acutely affected and spend more in the economy to protect jobs and livelihoods.
But even in Kerala, this package is insufficient. What Kerala has done is to touch up on those few taxes and bill payments on utilities that are under its control. The major taxes, including GST, are under the Centre’s control. Moratoriums and debt relief are under the domain of the Centre and the RBI. Sectoral revival packages have to be national. So, until the Centre comes in and takes up the major burden of revival, the state-level efforts would be just too little.
There has been a call from some industry quarters for a temporary Goods and Services Tax (GST) holiday for certain sectors. Or, if not that, temporary reductions in GST rates. How feasible would either idea be?
Yes, I am in general agreement on GST relief, but at the same time emphasise that the sectors and sections given this assistance should be carefully selected. A blanket GST reduction or exemption will be counter-productive.
The government should consider specific criteria for the provision of such assistance: impact on tax revenues, number of workers involved in these enterprises, size of the units, extent of debt overhang, linkages with other sectors in the economy and ability to bounce back.
But GST relief is just one relief that the government can come up with. There are other types of interventions too that it can indulge in. The overall focus has to be to protect workers and small enterprises that are most vulnerable.
Small businesses and daily-wage earners look to face the brunt of any potential lockdown. What should we take away from what other countries are doing? And in India should programmes like NREGA be quickly expanded?
If we see the economic initiatives against Coronavirus by major economies of the world, fiscal stimulus is the preference. These have taken many forms. Germany has pledged unlimited cash to its affected businesses. In Bavaria in Germany, small and medium-sized companies with less than 250 workers will obtain an immediate cash injection of between €5,000 and €30,000. After a first fiscal package in February, Japan has declared a second one on March 10 of size $4bn. It is helping small firms (whose monthly sales fall at least 15% below normal) by asking state-owned lenders to give up to ¥1.6trn of emergency loans without interest and collateral.
The size of America’s yet-unannounced fiscal package is estimated to be > $1trn (5% of GDP). The total extra fiscal stimulus announced by all countries till now is already 2% of global GDP, which is more than what was dished out during the 2007-08 financial crisis.
Fiscal policies are also trying to help people in distress. More than 25 countries are now using cash transfers as part of their economic response to Coronavirus. Brazil is giving its informal workers 200 reais ($38) each; pensioners will get their year-end benefits early.
Australia now has a one-time cash payment of A$750 ($434) to pensioners, veterans and people on low incomes. Germany has relaxed the criteria for “short-time work”, under which the government pays 60-67% of the forgone wages of workers whose hours are reduced by struggling firms. In Denmark, if firms risk cutting 30% or more of their workforce, the government will pay 75% of the wages of workers, who would otherwise be laid off, until June. Norway has raised unemployment benefits and guaranteed full salary to laid-off workers for the first 20 days. Norwegian workers who lose more than a fortnight’s work will be paid 80% of their previous average income by the government. In Sweden, half of the income of laid-off workers will be paid by the government, and employers will be asked to pay the rest.
How much will global fiscal deficits rise due to these steps? The Economist estimates that combined borrowings of 35 rich countries will rise from $1.5trn in 2019 to $4 trillion this year. No one appears unduly, and rightly so, worried about this extent of rise in borrowing.
This is where India has been found lagging. A package should have been announced 2-3 weeks back. Demand for goods and services has fallen across sectors. Production and supply networks have been disrupted. Sales of goods have plummeted; employment has collapsed and livelihoods have been destroyed. Rural areas have been particularly affected. In agriculture, sectors like dairy and livestock have witnessed a major fall in demand and prices.
In the non-agricultural sector, the unorganised sector and small and medium enterprises have been the most acutely affected. Also affected are service sectors like tourism, hospitality, trade and transport.
The government has asked people to practise social distancing and work from home. While these measures are important, the largest section of our population cannot afford the luxury of such caution. Being workers in the unorganised sector and unskilled, they have no room to work from home and are forced to commute in crowded buses and trains. This increases the risk of infections disproportionately among the poor and working people. To address this, there should be an immediate expansion of the public distribution system (PDS) in the rural and urban areas of all districts. The government should universalise the provision of subsidised food grains under the PDS till the crisis recedes.
The crisis demands that the government should raise public expenditure in the economy. There has to be a carefully designed fiscal stimulus package with focus on protecting jobs and restoring livelihoods. The costs of expanding the PDS should be considered a part of this package. Wages paid through the MGNREGS should be raised, and work should be assured for at least 200 days per job card in the next year. Many sectors in the economy are in dire need of revival packages and the government should consider providing the acutely affected sectors with exemptions and subsidies. Care must be taken to provide priority in these packages to small and medium enterprises. RBI and banks should be asked to step in, identify distressed loans and provide moratoriums and debt relief.
The required amount should be raised primarily by the central government through borrowings. If the state governments are involved, their borrowing capacity should be concomitantly expanded to enable them raise the required resources. In other words, fiscal conservatism should be discarded and the government should drop any worries about a rise in fiscal deficit.
How long do you expect the economic effects of Covid-19 to linger? In its latest estimates, Goldman Sachs has painted a bleak picture for the US economy, with growth projected only for Q3.
It is too early to say this. But I expect the economic effects of Covid-19 to extend to at least one year directly and even longer indirectly. Growth is an impossibility in Q1 and Q2. In Q3, there may be a revival, but only because of the low bases of Q1 and Q2, when real GDP is expected to shrink. Fall in crude oil prices is a relief, but the impact of the virus will surely overwhelm it. Much will depend on how China picks up the pieces. If China grows by 5% or more in Q2, it is a good sign.
But there is a larger point in all this. Even before the Coronavirus hit, the world was facing the prospect of a slowdown. Economic inequalities were also already at an unacceptably high level. Four decades of neoliberalism has left public education, public health and public social infrastructure in a disarray in the developed world. In the developing world, a welfare state is still a distant dream. Inequalities were always high; and unemployment levels have been soaring for a while. We were regularly told that the state has a lesser role than the market in setting these problems right.
I expect that the relative roles of the state and the market will be viewed fundamentally differently after the Coronavirus crisis. The role of the state in most economies is likely to deepen. The fantasy role of the free market in the economy had received a body blow with the financial crisis of 2008, but the Coronavirus episode has left it totally discredited. The market will have to be socially regulated. We already see a spate of nationalisations of private enterprises and banks across the world. This will likely be hastened. We may see the reinstatement of strong social security measures in the developed world, which neoliberalism had so meticulously dismantled over 40 years. The developing world will have to follow this path, and there will emerge strong people’s movements to install stronger and more comprehensive social security measures for the people, as well as to protect and promote employment.
Many have already pointed this out, but allow me to repeat. This is a shock to the capitalist economic system from outside the financial sector, from and in the real economy. So, this crisis cannot be resolved simply by bailing out a few big banks. This crisis is going to be more difficult to resolve. It would need a deeper intervention, a rewriting of old rules and writing of new rules. There will be losses for the entrenched sections. They will resist. But I do hope that a more pro-people idea of politics and economics will emerge out of this pandemic.