View: Go bolder and bigger on the COVID-19 relief package

“If it were done when ‘tis done, then ‘twere well, it were done quickly.” The principle applies not just to murder, but to provision of relief to a stricken economy as well. The government has chosen to announce its relief package piecemeal, which makes it difficult to assess whether it is adequate or not. It is to be hoped that when it comes to announcing a comprehensive relief package to help the nation tide over the Corona virus crisis, the government would move fast, bold and big.

It is inevitable that the government of India’s relief package would be assessed in relation to what other large economies of the world are doing. The US, for example, has announced a $2 trillion fiscal package, amounting to 10% of GDP. If shock and awe could kill the virus, the vile creature would now be ready for autopsy.

The US Fed has not just cut rates to near zero, but decided to buy bonds and commercial paper issued by companies, including those considered below investment grade. The European Central Bank has announced another round of quantitative easing, to buy not just government bonds but also corporate bonds. Whatever it takes, is the ruling philosophy.

So should it be in India. Forget the fiscal deficit. Everyone is a Keynesian in a foxhole. We are in a foxhole right now. The point about spending big in times of a crisis is to swiftly stop the spending when the crisis is over.

In this light, how does the Rs 170,000 crore relief package announced by finance minister Nirmala Sitaraman measure up? To begin with, the additional spending by the government is nowhere that figure.

The concrete additional outflows from the government relate to the direct benefit transfer of ex-gratia payments to pensioners, widows and the differently abled (Rs 3,000 crore), ex-gratia payments to women Jan Dhan account holders worth (Rs 10,000 crore). The promised increase in rural employment guarantee scheme wages could cost the government Rs 10,100 crore. But that is of no immediate use during the lockdown. How much money would need to be spent on paying provident fund contributions, amounting to of 24% of the wage cost, of enterprises that employ less than 100 workers, 90% of whom earn less than Rs 15,000 a month, is hard to estimate. In India, the vast majority of workers toil in the unorganised sector, where they get no benefits and provident fund contributions are a distant dream. The minimum wages for skilled workers would be higher than Rs 15,000 in several states and no one is going to admit to employing people at wages below the statutory minimum. If the government were to undertake to pay the provident fund contributions of all workers for all enterprises for a period of three months, it would make a difference. The government could borrow from the Employees’ Provident Fund Organisation to finance this operation — after all, the EPF has to deploy its funds somewhere.

The additional outlay on foodgrain and pulses would seem to be impressive, running to over Rs 50,000 crore. Actually, this would be cost saving, rather than additional expenditure. As of now, when the buffer stocking norm calls for 21 million tonnes of grain, the Food Corporation of India is sitting on nearly 60 million tonnes of grain, some of which would be ready to rot. Reducing the cost of storage, spoilage and pilferage by reducing height of the official grain mountain is a desirable thing to do, but does not really call for additional outlays.

Doubling the collateral-free loan amount that women Self-Help Groups can avail of is a brilliant move, provided the government would make it clear how it means to incentivise lenders to provide that additional credit. How much of government money would be spent on this is not clear. That is the case with the higher insurance cover for health workers and probable outlays on additional cylinders of cooking gas under the Ujwala scheme, which is popular more for the status improvement it brings with it in villages where only the upper caste elite typically had cooking gas connections, than for its actual use in rural areas.

Additional withdrawals from the EPF would hollow out their pension pots and make their old age vulnerable. Utilising money from the Construction Workers’s welfare fund and the District Mineral Fund is a sound move: but rigorous guidelines must be made public and enforced, to prevent babus from taking this opportunity to use these funds to buy cars and go on study tours to learn how to combat the virus.

A far more sensible way to make small industry retain their workforce is to make sure they get their pending payments from their customers upfront. The government has at its disposal the perfect mechanism to do this: the Trade Receivables electronic Discounting System (TReDS). It is a factoring platform, in which small businesses list their invoices raised on their big business buyers, participating banks take over bill collection from the small business and pay them their dues upfront, minus a discount that reflects the credit risk of the big customer.

In the normal course, a small business borrows money from non-bank sources, supplies stuff to its big biz customer, and waits for months to receive the payment, all the while paying interest at exorbitant rates to the provider of its working capital (small business obtains less than 15% of its credit from banks). If factoring were to work, their working capital requirement would come down drastically, and it would come from banks at rates that reflect the creditworthiness of their big customers, rather than the riskiness of their own small, collateral-scarce selves, they would raise proper bills, complete with GST, be forced to maintain proper accounts, disclose how many employees they have and become proper corporate citizens. But for this, their big customers must be willing to accept factoring. And come on to the TReDS platform themselves.

The government has said it will make it mandatory for all companies to register on TReDS and acknowledge to banks that the invoices raised on them by their small suppliers are genuine. Few have done so. Shirkers include public enterprises of the Centre and of the states, apart from private sector titans and aspiring titans. This must be tackled by deploying both carrot and stick. Penalties for refusing to come on to TReDS, including harsh ones such as imprisonment or steep fines or both, must be combined with financial incentives to induce all companies to be on board. TReDS must allow non-bank finance companies also to take part – only they have the capacity to deal with tens of thousands of small businesses. The financial incentive can be doubled for not laying off workers during the season of Covid19.

The government’s outlay on this would not be large, but the sea-change in systemic efficiency this would bring about would be truly remarkable. The probability of a V-shaped recovery after the pandemic-slowdown might not, by itself, induce employers to hold on to their workers during the phase of low or nil activity, but the prospect of being rewarded for not laying off workers could fortify their generosity.

When giving to the needy, let your left hand not know what your right hand is giving. This might be a good maxim for those noble of heart. For the more materially minded, letting the government know of a good deed, so as to qualify for a reward in return, such as a tax break or a subsidy, is more practical. Paying the provident fund contribution of workers for three months, stripped of all conditions, could be the reward for coming on to the TReDS platform and not laying off workers.

The government could issue a pandemic series of bonds to finance relief operations, open to not just the EPF, pension and insurance companies, but to mutual funds, individual savers desperate for a safe investment instrument in the midst of the stock market collapse and to foreign investors who know the dollar is overvalued in the current situation of panic and, when the rupee inevitably appreciates as the dust settles, the appreciation would add to the dollar returns on the bonds.

This is the time for the government to shed fear of the fiscal deficit and think big, act bold and do good.

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