Allocate resources, rationally and efficiently – analysis
Prime Minister Narendra Modi’s speech on May 12 had two central messages: India will have to learn to live with coronavirus disease (Covid-19), and India must turn towards economic recovery.
The recovery strategy will be carried out through a package of fiscal and monetary measures and a package of reforms. In a way, this is an intensification of existing efforts. Since 2017, government-funded consumer spending has grown rapidly, at an average real rate of 10.6%. Major reforms have been implemented: the goods and services tax (GST), insolvency reform, inflation targets. India’s ranking on the Ease of Doing Business Index has improved from 130 in 2016 to 63 in 2019.
But economic growth has slowed from 8.3% in 2016-17 to 5% in 2019-20. As a percentage of GDP, announcements of new private sector projects were the lowest in 2019-20 since the Center for Monitoring the Indian Economy started the data series in 1995-96.
This central paradox of recent years must be considered when evaluating the recovery strategy. We must be concerned with how the policies work and not just admire the list of announcements.
About tax support, three facts are important to consider.
First, no matter what nuclear option is used to expand resource availability, fiscal resources will be scarce. Taxes, dividends, the spectrum auction and other income will drop sharply. A significant portion of the expense is committed, including Rs 7.1 lakh crore of interest expense in 2020-21. Expenditure on schemes such as the employment guarantee scheme and food subsidy will be increased.
Second, since the crisis is destroying considerable value in the economy, there will be many competitive demands on fiscal resources. To avoid a fiscal crisis later, the government must spend its limited resources efficiently.
Third, our spending system is plagued by a series of allocation and operational inefficiencies. This crisis requires comprehensive spending management reforms.
Taking this into account will give the government an idea of the budget constraint in which it can support the economy. Since we may need to live with Covid-19 for another year, there seem to be three good uses for money right now.
First, the government can help restart economic activity while Covid-19 remains a threat. Many of those concerned with attracting the wrath of the virus can stay away from economic activities. We need to reduce the subjective probability that people have of contracting the virus and dying from it. This requires intensifying public health measures (detection, testing, quarantine, and treatment efforts); expand public transport deficits to guarantee social distancing; and increase resources for public order. These efforts can reduce the economic costs of the crisis and preserve the economic value. While businesses, communities, and families can contribute, these efforts will cost fiscal resources. Most of these activities are within the purview of state and local governments, which lack resources at this time. Therefore, a large part of the tax package must be turned over to the states to spend.
Second, while the government has announced relief measures, it is becoming clear that many vulnerable sections, especially informal and migrant workers, are lagging behind.
Since the unemployment rate is around 25%, and many households are struggling to make ends meet, there is a duty to ensure that aid arrives on time. One of the systems that needs to be urgently reformed is the integrated management of the public distribution system, so that the food subsidy can be used anywhere
the country. More cash transfers may also be required.
Third, since uncertainty limits the effectiveness of liquidity measures, they must be complemented by fiscal measures. Solutions like creating a bad bank or early recapitalization cannot reduce this uncertainty. The government has announced a scheme to provide full guarantees for loans granted to micro, small and medium-sized enterprises (MSMEs). This leaves little incentive for banks and non-bank financial companies to identify companies likely to survive the crisis with credit support.
It would be better to give partial guarantees. Similarly, the government needs to be criticized for spending money. It may not be a good idea to infuse resources into the weakest MSMEs (subordinated debt of Rs 20 billion) during such a crisis.
In the package of reforms, it is worth considering two points. First, the government must send a message to its compliance authorities that this is a time to be pragmatic about their approach to business, as they struggle to deal with this crisis. the de jure policy changes are not enough unless the general political stance towards business and market changes.
In recent years, there has been an increase in government hostility towards the private sector, as evidenced by the increase in tax disputes and the actions of law enforcement authorities. Second, the implementation and de facto the integrity of the reforms is important, as the GST example shows. Reforms do not automatically lead to good results.
Unless we are careful, we can do more harm than good in our response to this crisis. It is about achieving rational action when fear surrounds us. The question for us as a country is to paraphrase Rudyard Kipling: Can you keep your head up when you lose theirs?
Suyash Rai is a member of Carnegie India, New Delhi
The opinions expressed are personal.