Mohan Guruswamy: Where's the money? Just shake the tree and pick the fruits that fall

The economic cost of the Covid-19 pandemic is going to be huge. A shutdown for a month literally means a hole of at least 8.5 per cent in the annual output. Consumption (C), which accounts for almost 63 per cent of GDP, is not likely to recover to that level, for this year at least. The view among most economists is that the annual GDP growth is likely to be about 0.5 per cent or less. This implies that annual consumption will decrease by about 6-8 per cent. Many others think the decline in consumption will be much greater and growth could be sub-zero How soon consumption recovers depends on how soon the lockdown ends and how soon jobs are restored.

The United States intends to pump $2 trillion, or about 10 per cent of its GDP, into its economy. Britain and France intend to pour in about 5 per cent of their GDPs, while Japan is injecting $1 trillion, or a huge 20 per cent of GDP. Our government’s economic revival package of Rs 1.7 lakh crore is about 0.6 per cent of GDP. Even within it, a third of it is money already collected as a cess for the express purpose of aiding construction labour and left unused for years. So, Narendra Modi’s revival package is no more than 0.4 per cent of GDP. We clearly need to do much better.

The collapse of consumption will not only result in a commensurate contraction of manufacturing, but will also choke the system with huge unsold inventories. Resuming manufacturing to even near old levels will take longer due to supply lines being disrupted. The automotive sector, which accounts for 7.5 per cent of GDP or about half of all manufacturing, will take longer to revive as consumer confidence has shrunk. The recovery of manufacturing depends on how soon this sector revives. The incidence of automotive taxes ranges from 29 per cent to 46 per cent of end prices. To get the unsold stock moving, the government can consider a deep slash of GST for a limited time to get customers rushing back into the showrooms with their chequebooks.

But most damaging of all is the loss of jobs. India has a labour force of about 495 million. Santosh Mehrotra, professor of economics at JNU, co-authored a paper with Jajati K. Parida pegging the share of the informal sector at 90.7 per cent overall and 83.5 per cent in the non-farm sectors. Using NSS and PLFS data, they estimated that 260 million people are employed in India’s non-farm sector and 205 million in agriculture. Thus, the number of informal workers totals about 217 million across the services, manufacturing and non-manufacturing sectors.

The paper further suggests that about 136 million workers in India, or over half the total workers in non-agricultural sectors, have no contracts and remain the most vulnerable in the aftermath of the lockdown. They are almost all daily wagers. The latest CMIE report estimates unemployment in this sector to be a little over 30 per cent, or anywhere between 4-50 million rendered wageless. Daily wages are just about enough to meet the most basic daily food requirements of a typical poor household. 

So what can prime minister Modi do now to get us out of this quagmire? As it is, he is hamstrung by a weak economic management team with novices as two key players, the finance minister and RBI governor. Even if he addresses this, where will the money come from?

India has over $480 billion nesting abroad earning ridiculously low interest. Even if a tenth of this is monetized for injection into the national economy, it will mean more than Rs 3.2 lakh crore. At last count the RBI had about Rs 9.6 lakh crore as reserves. This is money to be used in a financial emergency. We are now in an emergency like we have never encountered or foresaw before. Even a third of this, or about Rs 3.2 lakh crore, is about twice the present plan. 

There are other sources of funds too, but tapping these entails political courage and sacrifices. Our cumulative government wages and pension bill amounts to about 11.4 per cent of GDP. After exempting the military and paramilitary, which is mostly under active deployment, we can target 1 per cent of GDP just by cancelling annual leave and LTC, and rolling DA by the last two or three increases. The government can also sequester a fixed percentage from bank deposits, say 5 per cent of deposits between Rs 10 lakh and Rs 100 lakh and 15-20 per cent from bigger deposits for tax-free interest-bearing bonds in exchange. The 10 top private companies alone have cash reserves of over Rs 10 lakh crore. There is money in the trees, and all it needs is a good shakeup to pick the fruits. The pain of the lockdown must not be borne by the poor alone. The government can easily target 5 per cent of GDP for the recovery fund as an achievable goal. The fiscal deficit goals can wait.

This money can be used to immediately begin a Universal Basic Income scheme, by transferring a sum of Rs 5,000 monthly into the Jan Dhan accounts for the duration of the financial emergency; fund GST concessions; begin emergency rural reconstruction projects to generate millions of new jobs and get our core infrastructure sectors like steel, cement and transportation moving again.

The lockdown cannot be an indefinite exercise. We need to progressively lift it so that the economic costs do not overwhelm us. Remember, the case fatality of Covid-19 is about 1 per cent, meaning it is not much worse than our usual seasonal influenzas. Its rapid spread is what makes it dangerous as it might overwhelm our medical care system.

The data available now makes it explicit that the Covid-19 virus is dangerous mostly to the physically weak and vulnerable. Over 63 per cent of those afflicted with visible symptoms are 60-plus. Clearly, we need to insulate senior citizens and children from infection. The lockdown can be targeted to protect them. Thus, while high schools, colleges and industrial workplaces can be opened, primary and middle schools can be shut for longer. We should also keep all places of social and religious gatherings like restaurants, cinemas, temples, mosques, churches, wedding/function halls etc closed for now.

The time has come to make tough decisions. Just clanging thalis and lighting diyas will not do.