The only way to come out of the looming economic crisis is to have large-scale direct cash transfer at least for the next six months to boost demand. This in turn will generate jobs and increase consumption levels to bring the country out of the trough it is in now
India is facing a humanitarian and economic crisis of epic proportions. As a result of the extended lockdown, millions of hungry and penniless migrant labourers are stranded in cities, desperately waiting for a seat on a bus or a train to take them home. Fed up of the endless wait, the “atma nirbhar (self-reliant)” among them decided to take matters into their own hands and began walking back to their hometowns and villages, hundreds of kilometres away.
These workers, who form the backbone of the informal economy of the country, are generally employed in Micro, Small and Medium Enterprises (MSMEs), restaurants, retail shops, construction sites and other enterprises which shut their doors during the lockdown or are at the brink of closure, due to it. What a lockdown of over nine weeks would do to the economy of the country and consequently, the lives of daily-wagers is not beyond the scope of the imagination of those who are in touch with reality.
The so-called Rs 20 lakh crore economic package was an exercise in futility, which did not offer anything to the struggling migrant workers. Instead, the Government announced measures to make it easier for Indians to travel to space. Perhaps, the Government got it wrong. People want to travel to their States, not space. Most analysts, rating agencies and banks have placed the size of the fiscal stimulus announced by Finance Minister Nirmala Sitharaman between 0.7 to 1.3 per cent of the Gross Domestic Product (GDP) and not 10 per cent as claimed by the Government. According to the Government’s own admission, a Rs 8.01 lakh crore liquidity infusion by the Central bank forms a part of this Rs 20 lakh crore stimulus.
The outcome of the Reserve Bank of India’s (RBI’s) Monetary Policy Committee (MPC) meeting, which decided to cut the repo and reverse repo rate further by 40 basis points (bps) to four per cent and 3.35 per cent respectively, came as no surprise. The consecutive rate cuts by the RBI are aimed at injecting more liquidity into the market. However, the industry and retail borrowers are not going to benefit from this rate reduction as there is no demand for credit. And for banks, liquidity is not an issue right now but risk aversion is. This risk aversion among banks is creating a hurdle in increasing credit flow and ensuring the transmission of rate cuts to the industry and retail borrowers. But these rate cuts will affect the middle and lower-income classes the most, with an expected fall in interest rates on their savings (Fixed Deposits) by around 0.5 per cent in the days to come.
However, banks alone cannot be blamed for turning cautious on lending. The economy is passing through uncertain times and banks are trying to prevent non-performing assets (NPAs). The primary issue is the absence of demand for liquidity and to generate this demand, capacity utilisation, which was 68.6 per cent (October-December 2019), has to be increased. Here comes the immediate need for additional Direct Cash Transfer of Rs 7,500 to each Jan Dhan, PM-Kisan and pensioner’s account. This transfer will generate demand in the rural and semi-urban sector, which in turn would force India Inc. to use the remaining 31.4 per cent capacity or go for capacity enhancement which may require liquidity support from banks. Just increasing liquidity in its current form by the RBI is not going to translate into higher credit offtake.
Another major announcement by the RBI was the extension of the moratorium on loan repayment by another three months. The RBI also announced the conversion of moratorium interest payment into a term loan, payable in the course of the Financial Year (FY) 2021. These measures could bring relief to borrowers but not for banks, as they will see more pressure on their balance sheets. The Government should ensure that in the endeavour to become atma nirbhar it does not end up making our banks and Non-Banking Financial Companies (NBFCs) “parmatma nirbhar (dependent on God).” In the last few years, we have already seen some examples of this in the likes of PMC Bank, Yes Bank and so on.
Another challenge for the country is the consistent increase in the food inflation rate. The unplanned lockdown resulted in major supply chain disruptions, which in turn increased the food inflation rate to 8.6 per cent in April. If proper planning regarding supply chains is not done before reopening the economy, food inflation will skyrocket. If food inflation does not decrease, we will have an economy with a high inflation rate and negative GDP growth.
Although the RBI has not provided any concrete number for the projected GDP for FY21, it predicted a negative growth rate. Already a few national and international rating agencies have forecast a negative GDP growth rate (minus five per cent), which can also have huge fiscal implications for India.
The only way to come out of this difficulty is to have large-scale direct cash transfer at least for the next six months to boost demand. This in turn, will generate jobs and increase consumption levels. Thereafter, our demographic advantage will accelerate the economic wheel of the country.
(The writer is Professor of Finance and National Spokesperson, Congress Party. The views expressed are personal)
