COVID-19: Way forward for Indian economy

The whole world is economically battered by the pandemic COVID-19 and India is no exception. The entire country is shut down for almost 2 months. No option was available with the Central and State Governments other than to go for such extreme measures. The economic fallout for a country like India will be devastating. I am sure great brainstorming must be going on in various sections of Government, corporates, and economy watchers on overcoming the impending economic crisis. Let us examine certain solutions which can kick start the economy and bring back the jobs. In this article I am not going to touch upon routine steps, compliance related or other aspects.

 

 

The major problem for various industries will be to sustain the costs and overheads during the course of the lockdown and restart operations. The industries like automobiles, consumer goods, real estate and such other non-essential industries will face the problem of lack of demand. People will conserve their resources due to the uncertainties about their future income and will avoid spending on semi-luxurious, luxurious or non-priority things. Every sector of the economy is more or less affected and is crying or expecting some relief package. The resources of the Government are limited and hence there is a need to find out smart solutions.

 

The various other stakeholders of the Indian society mainly labourers, farmers, domestic workers, middle class etc., are also staring at economic crisis and will need money in their hands. This will be required to sustain them and also to spur the demand. So can a Government which is itself stressed due to falling resources satisfy all the sectors of the society? Let us now come to specifics. The size of Indian economy at present is said to be around Rs 200-220 lakh crore. Looking at the global scenario it is expected that Government will need a stimulus of around 8-10% of the GDP to bring the economy back on track. That means roughly Rs 16-20 lakh crore. Considering the total receipts of Government of India at Rs 30 lakh crore, this works out to around 60 per cent of the total revenue. How the Government will raise these resources. Let us find out some out-of-the-box remedies.

 

1. All industries whether manufacturing or services, big or small are struggling for finance. The banks are reluctant to fund the existing or new borrowers due to the risk of the finance turning into NPAs. On the one hand all the industries are crying for credit support and banks are reluctant to lend and on the other hand the banks are flush with funds and have parked their excess liquidity of around Rs 7-8 lakh crore with RBI at very nominal interest. Every day, there are reports of increase in bank deposits as money is being withdrawn from mutual funds and stock market. So heavy surplus liquidity will be available with the banks.

 

At present the total bank credit is to the tune of around Rs 100 lakh crore. Our ratio of bank credit to GDP is around 50 per cent whereas in developed countries it is more than 100 percent of the GDP. Government of India can ask the banks to lend money to the existing and new borrowers especially for their working capital needs to the tune of around Rs 7-8 lakh crore. The Government of India can undertake to bear the interest on such loans for next 2 years. Assuming a rate of interest of around 8 percent, this works out to Rs 1.28 lakh crore, spread over a period of 2 years i.e. Rs 64,000 crore per year. So in this manner Government can support industries and other borrowers like farmers, middle class people also. This will help all the industries to start their operations without the fear of the cash outflows on account of interest.

 

A huge liquidity of around Rs 7-8 lakh crore will be infused in the system without any substantial strain on the resources of the Government of India (only Rs 64,000 crore per year). So this will take care of around 50 per cent of the stimulus required for the economy. Within 2 years majority of the industries will become financially stable and would be able to serve the interest. This way banks would also be ready to lend to the borrowers. A risk of some accounts turning out NPAs cannot be ruled out, but the risk is worth taking. If all the industries start normal operations the taxes will come back to the Government and also job losses would not take its toll on the working class. (To be continued) The author is senior chartered accountant and economy watcher.