Covid-19: A two-pronged attack to save the economy

Barely thirty six hours after the announcement of the country’s lockdown, a fallout of the Covid-19 pandemic, the finance ministry announced a ₹1.70 lakh crore rescue package for the most vulnerable section of Indian population.

Under the Pradhan Mantri Gareeb Kalyan Yojna, launched on March 26, the government announced that 80 crore poor and needy, disabled and widows would be provided some form of an insurance cover from hunger, lack of funds, and even the scarcity of cooking gas, for their survival in these difficult and uncertain times.

A day later, the Reserve Bank of India governor Shaktikanta Das unleashed policy tools to come to aid of the economy. The RBI reduced repo rate by 75 basis points, reverse repo by 90 basis points, cut cash reserve ratio (CRR) by 100 basis points and injected ₹3.7 lakh crore into the economy to keep the system running smoothly with adequate liquidity .

Similarly, banks were allowed to grant major relaxations to borrowers on term loans and working capital. These included measures like a three-month moratorium on payment of instalments of term loan outstanding, deferring interest on working capital loans by three months. More importantly, ensuring that such deferments would not be considered as non-performing assets or having an adverse effect on the credit history on the company.

These two measures, along with a few others, are aimed directly at the poor and vulnerable section of the society, including small business owners and self-employed people, who are the first to be hit by any such economic crisis.

The strategy of the finance ministry was simple: To make adequate food available to the poor and the needy through the public distribution system, additional funding through their Jan Dhan accounts and ensuring adequate supply of cooking gas made available under the Ujjwala Scheme.

80 crore poor people will now get an additional 5 kg of wheat or rice and 1 kg of preferred pulses free every month for the next three months to tide over the current crisis to be made available in two instalments. Similarly, the government would front-load ₹2,000 paid to farmers in the first week of April under the existing PM Kisan Yojana in addition to the ₹6,000 they were getting every month. The number of beneficiaries would be 8.69 crore farmers.

Other benefits include doubling the amount of collateral-free loan of ₹20 lakh to 63 lakh women employed in self-help groups, which would in turn help seven crore households. The government also promised to pay the entire 24% provident contribution of both employers and employees for three months to establishment with less than 100 workers. Of these, 90 % get ₹15,000 per month or less, which will benefit 80 lakh workers.

Workers would also be allowed to draw non-refundable advance of 75% from credit from their provident account or three months’ salary, whichever is lower. While this would entail amending the provident fund regulations, it would benefit 4.8 crore workers. And there were a host of other such measures to benefit the poor and the downtrodden.

Clearly, the priority of the government has been to save the lives of these 80 crore people, who simply have little or no savings to tide over the smallest crisis, since they have a hand-to-mouth existence. Secondly, most daily wagers are the first to lose their jobs in any kind of economic crisis and hence protecting their incomes if not their jobs becomes that much more important. Even small businesses and vendors suffer heavily when there is a lockdown or curfew and hence need to have some kind of financial help to tide over a crisis.

Then there is a consumption argument in funding the poorest of the poor. Unlike the rich and the middle-classes that defer buying and prefer to save during times of distress, the poor are the first to spend whenever they have some money in hand. This will hopefully create a virtuous cycle of demand that will result in higher production of certain goods in the country.

The RBI, on its part, has come out all guns blazing, exceeding the expectations of many. The need of the hour, governor Das said, is to do whatever is necessary to shield the domestic economy from the pandemic. “Central banks across the world have responded with monetary and regulatory measures—both conventional and unconventional,’’ he said adding: “Tough times don’t last. Tough institutions do.” Strong words that would not just calm the volatile stock markets, but also boost the confidence of India Inc. leaders and individuals as well.

While most people have commended the timely action of the RBI governor, there are others, who believe that Das should have kept some more firepower in his arsenal in case the Covid-19 pandemic was to continue for a far longer period. For instance, without giving any GDP growth projections or inflationary expectations, Das has already cut the repo rate by 75 basis points bringing it down to 4.4% with immediate effect. “In case the impact of Covid-19 persists or turns even worse, the scope for cutting rates will become that much more limited,’’ says an economist who spoke on the condition of anonymity. Secondly, others believe that there was no need to cut repo rate by such a huge margin, especially at a time when the economy is witnessing a severe demand slowdown and the fact that effective transmission of rate cuts takes a few quarters to reach the right people. “Cutting CRR by 100 basis points would have ensured enough liquidity into the system.’’

However, without getting into the pros and cons of every decision the government has send a clear signal to the country and the world that it would do everything within its power to effectively combat the economic fall-out of Covid-19. But whether those steps will be enough for such a calamity, only time will tell.