COVID-19: Blunting the economic impact of a pandemic

COVID-19: Blunting the economic impact of a pandemic

Context: Prime Minister Modi constituted the task force under Finance Minister to assess the economic impact of the pandemic and suggest palliative measures.

The following are some suggestions for the task force

  1. Cash transfers
  • Casual Job workers like construction workers, cab drivers, restaurant waiters, mall workers, domestic help, itinerant retailers are either already without jobs & incomes or will soon find themselves in that position.
  • Cash transfers of a fixed amount to these vulnerable sections would be useful.
  • There are 33 crore accounts under the Pradhan Mantri Jan Dhan Yojana that can be leveraged for this purpose.
  • There is also an efficient Public Distribution System prevalent in most States through which the beneficiaries can be identified for a cash handout.
  • Cost Estimation: A transfer of ₹1,000 to a total of 23.53 crore ration card holders will cost the Centre over ₹23,500 crore
  • Hong Kong announced a cash handout of HK$10,000 to every permanent resident as a supportive measure.
  • The United States is also weighing the option of a cash handout totalling $250 billion to its citizens.
  1. Loan guarantee
  • Service industries such as airlines, hotels and restaurants and tourism have begun to feel the impact of COVID-19 and in course of time it will extend to the manufacturing sector as well.
  • There will be revenue and profit issues to deal with later but the immediate crisis is one of cash flows.
  • Banks are also not going to offer any accommodation to these businesses given their own issues with NPAs.
  • This is where the government can offer loan guarantees to affected businesses.
  • For a start, government can provide guarantees to working capital loans and link it with assurances from the borrowers concerned that they will secure the jobs in their companies.
  • Britain has pledged £330 billion of government-backed loans and guarantees, France and Spain have announced €300 billion and €100 billion aid, respectively.
  1. Mortgage holiday
  • An equated monthly instalment (EMI) holiday can be a huge blessing for individuals and businesses when faced with a job loss, salary cut or loss of revenue.
  • three-month mortgage holiday should be coaxed out of lenders by the government for businesses in obvious trouble and to those employed by such businesses.
  • RBI should show regulatory forbearance in the matter of asset recognition for banks when it comes to these industries.

There are other helpful actions that the government can take such as

  • Promptly discharging its bills
  • Refunding taxes without delay
  • Promptly carrying out direct benefit transfers already budgeted for
  • If necessary, even permitting affected businesses to temporarily delay payment of statutory dues such as provident fund and ESI.

How to finance?

  • Cooperative Federalism: The resources of the Centre and the States have to be pooled to develop a national response to economic challenge posed by COVID -19 pandemic
  • Kerala, for example, has already announced a ₹20,000 crore package and other States may follow suit
  • Leverage Private Expertise: The government will have to engage with the private sector while devising assistance measures.
  • Bonds: A well-structured, tax-efficient bond issue can be an option to tap into the large pool of domestic savings. The large Indian diaspora can also be tapped into.

Conclusion

The government needs to come up with financial action plan involving all stakeholders (States & private sector) so as to tide over the crisis caused by the pandemic