Thursday, January 20, 2022

India’s Economic Response To Covid 19 Pandemic

Prime Minister Narendra Modi announced a Rs. 20 trillion economic stimulus package to respond to the covid19 pandemic in India. The details of this package would be in tranches. The first tranche announced by Finance Minister Nirmala Sitaraman focused more on infusing liquidity into the stressed units like MSMEs and NBFCs.

Against the backdrop of rare–corona virus pandemic; India has been put in a lockdown mode. While trying to “flattening the curve” by reducing the number of human lives being lost through lockdown strategy, enormous economic disruption has taken place. The policy response to “lives versus livelihood” has been the objective of the government.

The initial policy packages announced by the Finance Minister and the Reserve Bank of India (RBI) had focused more on providing the basic income support to the vulnerable people and to infuse liquidity into the system. However, a need was felt then to scale up the policy response package against the mounting humanitarian crisis. The IMF has estimated that there would be a fall of minus 3 per cent (- 3 %) in economic growth due to corona virus pandemic. There is huge uncertainty as it is both a public health crisis as well as macroeconomic crisis.

India has responded to crisis with the “Atma Nirbhar” (self-reliance) policy package, which has four components – land, labour, liquidity and laws. In first tranche of this policy package, Finance Minister Mrs. Sitharaman announced relief packages to the ailing Micro, Small and Medium Enterprises (MSME) sector. The Finance Minister has announced Rs. 20,000 crores of subordinated debt to stressed MSMEs. A liquidity infusion of Rs. 50,000 crores of equity has also been announced for the ailing units.

As the part of first policy response package, Finance Minister had announced “Pradhan Mantri Garib Kalyan Yojana”. One of the components of that package was regarding the EPF – under which the Government of India contributes 12 per cent of salary each on behalf of both employer and employee, this programme will be extended for three more months. It is estimated that the total benefits accrued will be about Rs. 2,500 crores. It is also estimated that 72.22 lakh employees will be benefiting from this announcement.

The government has also announced packages to infuse liquidity into NBFCs. Lack of adequate revival of economic growth was there in NBFC sector even before the coronavirus pandemic. To infuse liquidity into NBFCs, a Special Liquidity Scheme of Rs. 30,000 crores, was announced in the first policy tranche.

Despite surplus power generation in our country, hundred per cent rural electrification is still a matter of concern. The UDAY programme (Ujjwal Discom Yojana) announced as a tripartite agreement between Ministry of Power, DISCOMs and the State governments – issuing a non-SLR bond has resulted only in partial success related to the efficient financial and operational parameters of the DISCOMs. UDAY has also affected the state finances. However, a new “liquidity injection” to DISCOMs of Rs. 90,000 crore was announced yesterday. This liquidity is infused to DISCOMs to settle their dues to transmission and generation companies.

The real estate sector also has received attention in the first tranche of the covid policy response. The registration and completion date for all registered projects will be extended up to six months and may be further extended by another 3 months based on state’s situation.

In case of direct taxes, various measures are taken to reduce the ‘Tax Deduction at Source’ and ‘Tax Collected at Source” for all non-salaried payment to residents, and tax collected at source rate by 25 per cent of the specified rates for the remaining period of FY 20-21. This policy is to provide liquidity to the tune of Rs. 50,000 crore.

In the second tranche of the policy response, government would provide free rations to migrant labourers for the next two months. Rs.5,000 crore special credit facility for street vendors. Rs.30,000 crore for emergency working capital for farmers has been announced.

The announcements by the Prime Minister is based on “self-reliance”. We need to focus on local products, as in crises they are within reach of the domestic consumer. The significant financing modes of the covid19 policy package – Rs 20 lakhs crores (which is as high as 10 per cent of GDP) – is welcome. It is expected to boost India’s economy significantly.

Script: Dr. Lekha S Chakraborty, Professor, National Institute of Public Finance & Policy

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