As the world comes to terms with the severity of the COVID-19 crisis, it is evident that the pandemic will have transient as well as permanent effects on the economy, businesses, and society as well as individual behaviour. In the near term, the demand for certain goods and services (e.g. theatres, commercial real estate and transport services) may not return to pre-COVID-19 levels ever. Migrant workers will take much longer to return to cities and resume work in factories and some of them may not return at all.
This may lead to decongestion of some cities and reduce the load on urban infrastructure. There could be a redistribution of migrant labour within the country and that may lead to more inclusive growth, with manufacturing facilities coming up at newer locations and away from the current centres of production. The advent of Industry 4.0 is going to be accelerated as factories will struggle to find labour that was earlier easily and competitively available in a country like India.
This global crisis will have an impact on all the megatrends – accelerating urbanisation, shift in global economic power, demographic shifts, rise of technology and climate change and resource scarcity. Some of these megatrends may possibly get reversed or slowed down, like accelerating urbanisation, climate change and resource scarcity. However, some of them like adoption of technology and shift in economic power may witness further acceleration. Some countries may experience a demographic change if a vaccine or therapeutic care to COVID-19 is not developed soon.
In light of these anticipated changes, the government of India (GoI) also finds itself in a volatile, uncertain, complex and ambiguous (VUCA) situation as many businesses grapple with disruptions that have emerged out of the crisis.
Some of the key dimensions that the GoI would need to focus on in its long-term plans to restructure the economy post the COVID-19 crisis are highlighted below:
Income redistribution: Given the higher adoption of technology and the possible faster advent of Industry 4.0, there would be a need for a scheme like universal basic income. Direct and indirect tax structures may also need an overhaul.
Pay structures for essential services staff: The COVID-19 crisis has redefined the importance of essential services. Before the emergence of this crisis, home delivery services personnel, waste management personnel, grocery store staff and others were not deemed essential services. These roles are relatively low-paid, and there is a need to protect the income of personnel engaged in essential services and provide them higher insurance coverage.
Contingency funding for businesses: The sudden disruption has impacted the cash flow of several businesses and poses a risk to their existence. The GoI has a mandated a reserve fund for the guarantees it provides to public sector businesses. Going forward, the GoI can consider creating a mandatory contingency fund for businesses (set up from their turnover/profits) to utilise it in times of crisis. It could be designed in the lines of a disaster insurance that all businesses could subscribe to.
Healthcare infrastructure: The healthcare infrastructure and medical crisis preparedness of the country has to be improved and a certain level of predefined allocation from the government budgets is needed for us to be well-prepared for such eventualities in the future.
Besides the above longer-term measures, some of the immediate macroeconomic and fiscal measures that will be imperative for the GoI to address the current situation and boost the economic engine are discussed below:
Liquidity support for businesses: Working capital should be made available to large businesses through interest-free, very short-term corporate bonds directly purchased by the Reserve Bank of India (RBI). Similarly, banks should look to provide very short-term, interest-free working capital loans. The micro-finance institutions could be given interest subvention for lending to MSMEs to meet their working capital needs.
Debt servicing obligations of businesses: A moratorium on debt servicing obligations of companies could be contemplated, with the GoI partially compensating the banks for their loss of interest income.
Easing export clearance procedures: The various export clearance processes could be waived for a period of 3–6 months to hasten exports.
Demand creation: States could be allowed to benefit from a central sector scheme for the distribution of in-kind support, viz. durable goods like fans, mixer grinders and computers, with the option to choose from among any such goods by the beneficiary.
Managing expenses at the state level: Instead of allowing states to breach their individual fiscal prudence requirements, the central government should extend financial support to them through a central stimulus pool based on the Finance Commission formula for transfer of resources. This will allow the centre to handle and manage the aggregate deficits more efficiently.
We expect economic growth to be much slower in FY20–21 and hope that we do not enter a contraction, which is quite plausible if the current disruption persists. The GoI will be under immense spending pressure and tax revenues are likely to decline significantly. The GoI may have to temporarily suspend its fiscal prudence and increase spending to provide the requisite stimulus. As the Government is expected to breach its fiscal deficit target, the country may face a rating downgrade and higher inflation. However, given our share of low external borrowings and weak demand, we can take calculated risks on these two fronts. Strong and immediate action is needed to break out of the vicious economic cycle that the crisis has thrust the country into.
Views are personal.
Deepankar Sanwalka is leader – Advisory, PwC India, and Ranen Banerjee is leader – Economic Advisory Services, PwC India.