June Is the Month For Plotting Demand Boost: Here’s What To Do – And Not Do

The Prime Minister did well to tell businessmen at a Confederation of Indian Industry (CII) conference yesterday (2 June) that growth and revival were his top priorities. “Economic growth is our priority. Several decisions have been taken that will have short-term as well as long-term benefits for India’s growth trajectory,” The Economic Times quotes him as saying.

The reference was, no doubt, to the Rs 20 lakh crore package, which included large amounts of liquidity support to many sectors, including Rs 3 lakh crore of loan guarantees for micro, small and medium enterprises (MSMEs), Rs 90,000 crore in emergency funding for stressed discoms, and promises of structural reforms in agriculture (tweaking the APMC regime, contract farming), the Essential Commodities Act, and coal and minerals mining.

Additionally, there is relief in provident fund contributions for employers and employees, EMI moratoriums for the middle class, and investment support for farm supply chains and agro-industry.

Apart from this, Jan Dhan accounts held by women have been seeded with Rs 500 every month for the last three months, and the Kisan Samman cash subsidies for farmers (Rs 2,000 every four months) have been front-loaded in April.

While street vendors now can claim loans upto Rs 10,000, returning migrant workers can expect at least short-term employment under MGNREGA with an additional Rs 40,000 crore being provided for it over and above the Rs 61,000 crore announced in the 2020-21 budget.

Most critics have gone overboard to suggest that this is all pie-in-the-sky, and puts little money in anyone’s pockets, especially the poor. Supply side reforms are fine, but many sectors hit badly by the lockdown and the poor need money now – which implies that demand must be stimulated by putting cash in everybody’s hands, and not just loans.

There is some merit in these criticisms, but also some illogic. First, supply side stimuli boost demand for investment goods and create their own virtuous cycle of growth, jobs and incomes.

Second, stoking additional consumer demand when most businesses and manufacturing units are closed or working far below capacity will only boost inflation as the new money chases fewer goods. The medium-term growth of India will have to be driven by investment and not just consumption.

However, June is the crossover month when we move from lockdown to revival, and this is thus the right time to plot the demand boost. In July, when most rigours of lockdown end in most parts of the country, we must have a demand boosting package. Here’s a starting list.

#1: The government has a golden opportunity to fix the skewed GST rate structure in one go, since a stimulus anyway means big cuts in duties. In one fell swoop, it should cut rates to just three – 5, 15, and 25 per cent – with the cess being limited to only sin goods (cigarettes, liquor) and ultra luxuries (SUVs, luxe homes).

#2: Some sectors are more deserving of extra help than others. For example, it is impossible to maintain physical distancing once normal work starts in cities and migrants start moving back to project sites. This means massive investments in buses must be incentivised.

The Centre should offer not only GST relief to bus-makers, but also interest-free loans to all fleet operators, both state-owned and private ones, to buy new buses. This will stimulate the auto industry. The two-wheeler and four-wheeler sectors need some regulatory concessions, as most of them are otherwise profitable.

Two-wheeler demand will revive shortly in rural areas as agriculture is minimally impacted, and car demand will see a temporary spike due to pent-up demand. Many people who had abandoned second cars to use Ola and Uber will now seek personal transport alternatives, at least till we find a vaccine for Covid-19. The personal vehicles segment thus needs no special package.

#3: The MSME sector needs more than loans, and some attrition is unavoidable given the unviable nature of most of them. The viable ones need to be allowed to expand, and apart from collateral-free loans, they can also be given interest subventions (ie, zero interest in 2020-21) so that they are actually induced to borrow and expand and retain jobs.

#4: Sectors like airlines need liquidity support. The industry is an oligopoly, with just three or four major players, including Air India. If government merely looks the other way when they raise fares in the short run in 2020-21, they will more than make up for the losses of the lockdown, and cover the additional costs incurred due to the introduction of safety measures at airports and inside aircraft. Airport fees may need raising, and some of it is already happening.

#5: Healthcare needs the biggest fillip, both in the state sector and in the public sector. It is also where the newest jobs will get created, for health is a high-touch sector, where human skills are going to be important in handling patients and in elder-care.

Massive investments are needed in tele-medicine, primary health centres, vaccines and medicine development, nurses training, low-cost hospitals and mobile treatment centres, among other things. India has to triple or quadruple investment in this sector every year for the next five years to make up for a 70-year deficit and underinvestment. Most of it should be front-loaded this year and the next.

#6: Construction needs a huge fillip, since it creates many jobs – though not as many as before. This sector will consolidate and the smaller players will possibly exit while the larger players will automate more of their work. This implies that wages for skilled workers will increase while less skilled ones will be required in lesser numbers unless the scale of infrastructure investment multiplies several-fold.

Large dollops of liquidity and incentives to retain labour may be required, apart from project loans for automation and productivity-boosting machinery.

One sector that should not be mollycoddled is real estate. Reason: this sector already has many incentives, from tax-free profits for affordable housing projects to interest subventions for loans. The sector has a structural problem – bottling up of land supplies – that cannot be remedied without a price crash.

Till that crash in demand occurs (ie, with states and municipal bodies drastically expanding land supplies), overall demand will remain restricted to less than 1 percent of the high-end population.

This is no way to grow a sunrise sector for India needs more housing than almost any country in the world. We need a land prices crash – which will leave many losers – to revive the real estate sector. The sector’s woes have little to do with Covid-19. Unless the pandemic forces a real rethink among land sharks and regulators any relief measures will be more money down the drain.

This is not an exhaustive list of sectors that need attention before the economy reopens for normal business in June, but it is a starting point.