Managing Economic and Financial Fall-Out of Coronavirus-19

MANAGING ECONOMIC FALLOUT OF CORONAVIRUS-19

Ten Most Urgent Measures which the Government Must Take Right Now

Our economy has been jolted and disrupted majorly by the Coronavirus-19. A large part of the economy- major labour-intensive industries like construction, small and medium industry other than those producing essential goods, services like transport, tourism, hotels, sports, entertainment and several others- have practically collapsed or are under shut-down. Fear has overtaken financial markets, accentuated by the massive sell-off by the foreign investors. So far payment systems and asset management industry like mutual funds have not defaulted but it might not be far off. Besides the health workers and establishments, telecommunications and information technology industry has rendered yeomen service to keep whatever industrial and services economy is functioning and to keep Indians safer from spreading of Coronoavirus-19.

This is the time to take every possible measure for protecting production and distribution system for ensuring supply of all essential goods and services to the 130 crore Indians. It is the time to take every possible measure to upgrade and scale up telecommunication and information technology industry to save jobs and production for the present and lay-down the foundation for further transformation of Indian economy into digital economy. It is the time to prevent Indian financial industry from falling apart. It is the time to provide life-line to the workers affected by the disruption for the period this is likely to last.

For serving these objectives, following measures must be taken without loss of any more time:

1. About 10 crore informal/ unorganised sector workers- in construction, in street food and other retail jobs, in hospitality and travel industry, in other tiny and small industries and enterprises- have been rendered jobless by the collapse of these business, especially after current massive lock-down, which is no doubt, essential. While some of these jobs might return once the lock-down gets lifted on 31^st March (unless extended, which is quite likely), lot of these workers are likely to remain unemployed for at least three months. The Government must provide a cash support of Rs. 1000 per month and in-kind support of another Rs. 1000 per month (for cereal, pulses, medicines, sanitary essentials and the like) to every such affected workers. Digital capability of India, accompanied by the Aadhar database can help in quickly creating this database. This will cost about Rs. 20000 crore per month and Rs. 60000 crore for three months. The cost can be shared by the Centre and the States in 50-50 ratio.

2. The enterprises which employed these estimated 10 crore workers have also lost their turnover/income. A good part of their costs (rents, maintenance, interest payments) etc., however, are required to be paid. These enterprises have to also service their loans. Two measures need to be taken. One, deferment on servicing of the loans need to be granted by the regulators. Second, the Government should come out with an informal and small enterprises temporary assistance programme. Under the programme (say COVID-19 Emergency Working Capital Facility for Small Businesses), such enterprises should be registered, assigned a unique business code and provided loans at nominal interest (2-4%) only for taking care of their minimum working capital needs for next three months. Financial institutions- banks, rural banks, cooperative banks, micro-finance institutions- can operate the programme with funds provided by the central and state governments. It is difficult to estimate the amount required, but assuming that about 2 crore enterprises might need it and the average amount needed is about Rs. 50000, it might at best require funds of about Rs. 1 lakh crore.

3. Agriculture is relatively unaffected by the Coronavirus-19 disruption. Major Rabi season is almost over. The demand for agriculture produce has also gone up- most for food and is likely to remain sustained for quite some time. What the farmers need is to be able to sell-off their produce at remunerative prices. What the country needs is that this raw agriculture produce is stored, quickly processed and the distribution system operates efficiently for the produce- raw and processed- to reach consumers seamlessly. The Government must do away with stock limits on agriculture produce immediately, rally up the food processing industry to ramp up storage and processing capacity and grant it all facility/support for transporting the same. This would not require much financial expenditure. This would, however, require all necessary regulatory and facilitative decisions to be made urgently to organise efficient production, storage and transportation.

4. The Government should scale up social safety programme like Mahatma Gandhi National Rural Employment Guarantee Scheme in this period of job stress. State governments also have a number of employment-oriented programmes. The Government of India can relax Fiscal Responsibility and Budget Management Act related constraints on the state governments to the extent needed for providing employment support to the people and to support tiny and small enterprises.

5. Telecom and information technology industry has come as a big saviour. The digital economy rides on these two sectors. It is extremely important that the telecom industry’s stress is relieved for it to not only remain functional but also scale up capacities to enable it to digitally deliver all possible services to not only in urban areas but in every corner of our vast rural hinterland. The Government must resolve the AGR issue forthwith. The Government, by exercising its sovereign power, should waive all penalties and penal interest on adjusted gross revenues (AGR) dues and provide a ten-year window for payment of remaining AGR dues. This will bring life in the telecom sector. The expansion of cellular services in rural areas has not taken place on account of extremely slow and inefficient implementation of Bharat-Net programme by DoT/BSNL. The Government should launch a crash programme to allow the three private sector companies to connect all the unconnected habitations by launching a programme on the pattern of SOUBHYA which provided every rural family with electricity connection. This programme should be implemented over six months. This will not only connect every rural Indian family with the internet, but would also provide much needed stimulus for the economy. There is no shortage of funds with the Universal Obligations Fund, which can fund this entirely. Finally, disregarding TRAI recommendations, the Government should allocate 5G spectrum at a nominal capital cost (may be 10% of the TRAI recommended price) and a reduced revenue share of telecom related revenues (may be about 5%). This will allow India to see faster roll out of 5G services on which the future digital economy will be built and provide enormous competitive advantage.

6. For re-starting the economy and for restoring jobs, the real estate sector provides the best opportunity. Unfortunately, the sector has been in big stress even before Coronavirus-19 struck. Incomes of lot of people who are the buyers of the flats of the stuck or under-construction projects are also going to be adversely affected. Most of the builders and real estate companies are too over-leveraged and too much out of the money to be expected to complete these projects. In fact, servicing of their existing loans itself appear nearly impossible. The IBC is the right solution for resolving these stressed real estate company, but a more expeditious and powerful mechanism is needed to resolve all these 100s of stressed real estate company, in a short period of time. The Government should create, by an executive order, an Indian Real Estate Administration Agency (IREAA), owned by the Government of India and the willing State Governments and managed by the real estate experts and financial agencies. The lenders should, in the first stage, resume these projects/companies by recalling their loans. This would throw out the stressed developers. The lenders can sell the resumed projects at fair market value to the IREAA. The Reserve Bank of India should provide a direct line of credit to the IREAA for purchasing these projects. The IREAA can then sell these projects to the new developers for completion of projects. The Banks would take lot of hair-cut on this. As a one-time measure of assistance, the Government can bear 50% of their loss which can be paid off by issuing bonds to the banks repayable equally in ten installments over a 10 years period.

7. Financial industry is under massive stress. Credit system is likely to collapse unless immediate steps are taken. The banks are likely to face servicing problems from both types of its borrowers- businesses and households. There is likely to be additional demand for credit from the businesses to tide over the loss of income/sales during the period of disruption. All three types of measures are required- a rate cut to lower the cost of loans, additional financing by extending the limit norms of loans and forbearance for some time. A 1% rate cut, relaxing the credit limit norms to allow at least 25% of additional financing and 6 months forbearance on servicing of loans would constitute a good package to provide much needed comfort to the businesses. About 1/3^rd of credit in the system is now extended by non-banks and micro-finance institutions. Besides making the regulatory relaxations for these institutions also in line with banks, the banks should also be asked to provide necessary credit lines to the non-banks to avail required finance to implement this package. RBI may provide adequate refinancing lines for the banks to provide this credit support.

8. Asset management financial institutions like mutual funds play a big role in not only providing good investment opportunities to the savers/investors, but also provide financing to the non-banks and corporates. The size of assets managed by the mutual fund industry surpass the total loans provided by the non-banks. Mutual funds are facing heavy redemptions in some segments like liquid funds, which reflect cash needs of the corporates which invest in liquid funds. Other segments of the mutual fund industry like the equity funds might also catch up this fever soon as the NAVs go down on account of equity values collapsing. If the interest rates rise on account of corporate default, the debt funds might also face massive redemptions. Domestic mutual funds, so far, have actually cushioned the impact of the foreign institutional investors selling equity and debt in the market. But this ability is likely to get compromised soon. The mutual funds need a liquidity life line. The Reserve Bank of India should provide a direct refinance facility to the Mutual Fund industry in India. If necessary, the GoI can provide a guarantee. A facility of about a Rs. 1 lakh crore announced immediately would provide enormous confidence. This facility may not finally cost the RBI/GoI anything.

9. Maintaining liquidity is the most important necessity in times like the present- both for payment system and credit system to operate uninterrupted. So far, RBI has maintained adequate liquidity in the system by operating the repo and the OMO windows. Measures outlined above will also enhance availability of requisite liquidity. It is also the need of the hour that not only system wide liquidity is maintained by the RBI, but functional liquidity is available to all segments of the financial system. RBI should also review the utility of Cash Reserve Ratio (CRR) system. It operates more as a tax on banks rather than a liquidity facility.

10. Value destruction in the equity market and also the debt market has to be stopped. In desperate times like this, lot of people develop complete risk aversion and those who see value picks also prefer to wait for getting still better bargain. Complexities introduced by the foreign institutional investors who have absolutely different incentives also complicate matters. FIIs are currently selling massively in all emerging markets. India is no exception. We need to save our companies- most urgently those which are truly at very good value. I wrote a piece on this calling for creating a Sovereign Wealth Fund using equity of the Government in the public sector enterprises and using this vehicle to buy the shares of the companies which are offering good value in the market- both public and private sector. This measure can be supplemented by two more steps. First, the buyback tax introduced in the budget last year should be simply abolished. Quite a few Indian companies have cash and are willing to buyback their share believing that there is lot of value in that. This should be encouraged by doing away with this buy-back tax. Second, LIC has a lot of investible funds. Either LIC should join in buying shares of the strong companies offering good value or the Sovereign Wealth Fund can issue bonds, of let us say Rs. 2 lakh crore, which LIC can subscribe for the SWF to use for buying shares from the market.

The current crisis would get resolved only when we have either a cure for the Coronavirus or the virus lose its strength on account of hot weather setting in or when the humans develop immunity against it (including by acquiring immunity if vaccine gets developed). All these possibilities are certain to be realised but there is no certainty regarding timeline for any of these to emerge. We can, however, work to prevent disproportionate damage to our economy and jobs. The proposals above are meant to achieve this outcome.

SUBHASH CHANDRA GARG

NEW DELHI 23-03-2020