Urgent Stimulus Required For Growth After Covid-19 Second Wave: Here's What It Can Look Like

The Indian economy functioned stronger than predicted in 2020 in the wake of the Covid-19 pandemic.

As a result, nominal Gross Domestic Product (GDP) grew to Rs 197.5 lakh crore, a contraction of 3 per cent from the 2019-20 GDP of Rs 203.5 lakh crore.

In terms of real GDP, the contraction was 7.3 per cent. Interestingly, the Q4 FY21 GDP in real terms showed an increase of 1.6 per cent compared to Q4 of FY20, demonstrating that the economy picked up towards March — corroborated by an all-time high in GST collections of Rs 1.41 lakh crore in March 2021.

Unfortunately, the second pandemic wave hit India at that time. A slew of state-wise lockdowns was announced — stunting economic growth and recovery, shutting down businesses and causing another wave of reverse migration.

Q1 of FY22 will record lower growth than expected, and the economy may only recover substantially from July.

Private consumption expenditure fell from Rs 123 lakh crore (60.5 per cent of GDP) in FY20 to Rs 116 lakh crore (58.6 per cent of GDP) in FY21.

It will fall further this year if the government does not offer incentives for increasing personal consumption.

We urge the government to consider an economic stimulus package as follows:

Stimulate Consumption

Automobile sector: The auto sector makes up 42 per cent of manufacturing. There is a need to incentivise consumption to compensate for the down Q1 quarter. It is suggested to waive the Compensation Cess (CC) part of GST on the sale of all automobile products for three months starting July 1.

Better to forego the cess than face the alternative of declining sales and GST collections, and manufacturing workers losing jobs as cost-cutting measures kick in.

Public transport: Incentivise purchase of 50,000 electric buses for public transportation by State Road Transport Corporations, of which 25,000 will replace old vehicles. An Rs 15 lakh/bus incentive, excluding the battery cost, could take care of 50-60 per cent of the bus cost.

The battery could be taken on an operational lease and compensated via the savings in fuel. This program will lead to newer vehicles, lesser pollution, job creation in manufacturing, and drive the rise of a new industry in India.

Tata Power is installing EV charging stations across the country, and the time is ripe to drive the ecosystem. A total cost of Rs 7,500 crore (Rs 15 lakh/bus x 50,000 buses), of which Rs 5,000 crore could be spent this year to boost the sector immediately.

The increase in sales and GST could recoup Rs 2,000 crore.

Real estate and housing: Mumbai reduced registration charges on real estate purchases from 6 per cent to 3 per cent for six months till March 31. The experiment was a success — Rs 60,000+ crore in sales with an inflow of capital into real estate/construction companies, fewer non-performing assets (NPAs), increased income to the government and new cycles of investment.

India reportedly has Rs 5 lakh crore worth of unsold housing stock. The government can incentivise states to follow Mumbai’s example of reducing registration charges from 6 per cent to 3 per cent for six months from July 1 to December 31 2021 by reimbursing states 50 per cent of the reduced revenue.

This move will recapitalise the real estate industry, create a boom in the housing market, and incentivise household investment and savings.

Invest in Urbanising 2000 Census Towns

India has over 7,500 census towns, which can serve as the country’s next growth engine. It is suggested to develop 2,000 of these towns all over India with industrial complexes, housing, and connected with world-class infrastructure.

The Centre’s budget will amount to Rs 20,000 crore — of which Rs 10,000 crore can come from the road cess from fuel and the balance from a stimulus package.

Large-scale Employment

India finds it difficult to compete in labour-intensive industry markets because most of these industries are located in high living-cost locations — driving the production costs unnecessarily high. Instead, if these industries relocate to rural areas — particularly near the 2,000 towns discussed above — labour costs will decrease dramatically, making it more competitive to produce in India.

250 districts across India can be deemed Special Industry Zones linked to the 2,000 towns. It is advantageous to locate these industrial complex towns in districts that today see significant emigration due to lack of growth opportunities, particularly in labour surplus states like Uttar Pradesh, Bihar, Rajasthan and Madhya Pradesh.

Industrialists that set up industries in these 250 districts and provide employment as part of this program can be incentivised with an income tax deduction of 150 per cent for jobs created for 10 years.

At an average wage of Rs 2 lakh per year per employee, these industries could provide 1.5 crore jobs a year when fully utilised.

Labour-intensive industries have low pre-tax profits of around 10 per cent. So the IT benefit will be Rs 7,500 crore a year at best (new industries pay only 15 per cent IT on pre-tax income today).

This benefit will pay for itself in terms of increased tax on consumption. If this program starts this year, the government may need to spend Rs 2,000 crore as part of the stimulus package.

Medical Infrastructure

The pandemic has clearly shown India the gaps in its healthcare infrastructure. The country needs a fully equipped multidisciplinary tertiary hospital in every district, primary healthcare centres in every taluk, and rapid brownfield expansion of colleges to train the required 1.5 lakh doctors and 2.5 lakh nurses every year.

On completion of these programs over the next two years, the government can direct these budgets towards increasing the healthcare install base in India. This year, the Centre could allocate Rs 10,000 crore towards starting this process.

Fiscal Measures

Income tax: The middle class and IT payers have significantly suffered during the pandemic, with a sudden increase in health expenses and inadequate relief from the government in the first wave. This year, it is suggested to simplify the tax slabs — no tax up to Rs 5 lakh of income, 10 per cent on Rs 5-10 lakh, 20 per cent on Rs 10-15 lakh, and 30 per cent plus surcharges on Rs 15+ lakh incomes.

Section 80 deductions for expenditure like housing and insurance will not be applicable in this system. The new slab system will help those in the lower slabs, those of age 55+ and retirees. The loss of revenue will be minimal since the S80 deduction no longer pertains but will increase cash in hand for consumption and generate a feel-good factor.

2. 80G deductions: Government can increase 80G deductions for charitable donations by individuals to 25 per cent of gross income for FY22. From the end of FY20, taxpayers have made large donations towards pandemic relief. The government must recognise this and repay in kind.

Death Compensation

Suggested Sources

1. Extra dividend from the Reserve Bank of India: While the budgeted dividend was Rs 60,000 crore, the government received Rs 99,000 crore. The additional Rs 39,000 crore can be channelled towards the economic stimulus package.

3. Despite the fallout of the second pandemic wave, there is still room to stimulate the economy. Much depends on the government taking the necessary steps to provide a stimulus package to drive consumption up in auto sales and housing and boost the manufacturing sector and job opportunities. Internal consumption is a crucial lever of Indian economic growth. Therefore, it is imperative to keep that at the heart of any economic relief measures.

(This piece was originally published in Sunday Guardian and is republished here with permission.)