Government’s Relief Package To Fight Coronavirus Fallout A Good Start But Not Sufficient In Itself

Within 36 hours of Prime Minister Narendra Modi announcing the lockdown to battle coronavirus outbreak, Finance Minister Nirmala Sitharaman came out with an extensive plan to provide a fiscal stimulus to the economy.

The stimulus focussed on the most vulnerable sections of the population and was in addition to the announcements that were made three days ago which focused on deferring the deadlines for tax payments along with some regulatory relaxations.

The Rs 1.7 lakh crore package has two components. The first focuses on ensuring food security and leverages on the Food Security Act by ensuring additional food grains (5 kg of wheat/rice and 1 kg of pulses) can be provided through the public distribution system (PDS).

The key focus is to ensure that people have adequate food to ensure nobody dies of hunger at a time that our entire country is shut. The programme covers two-third of the population and a simple increase in the entitlement should be easy to implement.

As a matter of fact, it appears that the entire package has been designed in a manner that prioritises the ease with which these programmes can be rolled out. Since ration card holders already procure from PDS shops, they would now be eligible to procure additional quantities.

The other pillar of the programme is of cash transfers, which have been done in a targeted manner through the direct benefit transfer (DBT) framework.

Some of these programmes have already been in place and the focus appears to be on fixing issues related to targeting of beneficiaries which could have further taken a lot of time and delayed the process of rollout of the income support measures.

The front loading of the first instalment of Pradhan Mantri Kisan Samman Nidhi (PM Kisan) programme will definitely be effective. However, agricultural sector (excluding allied activities) are unlikely to be significantly affected at the moment due to the 21-day lockdown.

The other policy intervention was to increase the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) wages by Rs 20 to provide an additional annual income of Rs 2,000 to 5 crore workers. This will be critical in creating some rural demand, which will only be realised over a couple of months after the Covid-19 disruption ends.

The other measures to provide an ex gratia amount of Rs 1,000 to elderly, widows and divyangs while additional Rs 500 per month for the coming three months to poor women with Jan Dhan accounts and free LPG cylinders ensure a sizable income support intervention for the bottom half of our population.

Indeed, there may be overlaps in beneficiaries and some households will end up benefitting under many of these programmes.

However, this is precisely why the small intervention under different heads will have a significant impact well beyond mitigation of the economic hardship that several households would face over the coming weeks.

One has to also consider the fact that economic growth takes time to recover and that it must be viewed as an organic process.

Therefore, a careful comprehensive package could be more potent at a time of crisis than a one-size-fit-all strategy even though the latter would cost less but would require significant capacity in targeting.

This could be one of the reasons why government preferred to announce several measures rather than a simple targeted basic income to address the present crisis.

The key issue being discussed is whether the current measures will be enough, and the answer is a strict no. It was, perhaps, acknowledged by the Finance Ministry which appears to indicate that more measures could be taken going forward. A careful assessment of the economy does merit for more measures over the coming weeks.

But before we get to more measures, here is an issue that has been bothering me with yesterday’s announcement and it pertains to organised sector workers under Employees' Provident Fund Organisation (EPFO). It appears that the government’s intention was to provide a wage support programme up to 24 per cent of the wage cost – which usually is the EPFO contribution.

However, they imposed a restriction that this is applicable for those establishments with up to 100 employees and 90 per cent of them must earn less than Rs 15,000 per month. This in my view is a minor irritant in many ways event though the rest of the measures were extremely positive and more importantly in the right direction.

The reason why this measure is problematic is that it yet again benefits the small establishments, which have been a problem in a lot of our policy measures. As the previous (2019) economic survey highlighted, India has a lot of dwarfs and a major reason is an unfair treatment given to them.

This encourages firms to remain small and at the moment, we must be focusing on helping our firms become bigger.

The US-China trade war and the Covid-19 disruption present India with once in a lifetime opportunity to emerge as a key trusted partner with select developed economies. The world is likely to realise just how unreliable and non-credible a non-democratic country can be, and this should ideally make them view us as the natural alternative.

The other issue was with the ceiling of income of Rs 15,000 while minimum wages in Delhi are usually at around the same value with the semi-skilled minimum wages being at Rs 16,341.

At a time like this, we should resist the temptation to put excessive inclusion and exclusion criteria for our policies. An alternative wage support programme for micro small and medium enterprises (MSMEs) could have been to offer up to 24 per cent of basic pay to 11 crore workers employed by them with a maximum ceiling of Rs 3,600 [the 24 per cent of 15,000 is also Rs 3,600].

This would have cost us Rs 36,000 crore instead of Rs 5,000 crore under the current programme, but would have had a significant and tangible impact on the MSMEs which are going to witness a cash-flow disruption.

However, one must appreciate the measures taken by the government and they are in the right direction. With more such announcements likely, there is a lot of anticipation of bold fiscal intervention to help different industries tide through these testing times.

The Finance Minister started with hitting a four with her previous announcements while yesterday, she swung hard and knocked the ball outside the boundary line. One hopes, the next ball is knocked out of the stadium.