Economy : The Way Back

Economy  :  The  Way  Back

On 25^th March, when FM Smt Nirmala Sitharaman announced a Relief Package of Rs 1.7 lakh crore ( approx. $ 22 billion ), she may not have reckoned with the possibility of the lockdown getting extended beyond 14^th April

Hence , that package was more like a BAND-AID on a body-scratch

But now with a consensus emerging about extending the lockdown ( although, in a phased manner ), quite possibly we are facing a DEEP WOUND !

And obviously , that $ 22 billion package just won’t suffice, for an economy where ( according to a recent news ), our daily GDP is approx. $ 8 billion ! –  a package worth 3 days of GDP !

There are two sides to any economy : 

The Demand side and the Supply side

For the fabric of economy, these are like WARP and the WEFT of threads .

If one of these threads gets damaged, the entire fabric starts unraveling !

In the Relief Package, there was very little for the factories / workshops , which produce the GOODS ( the SUPPLY side ) . Following are the main features of that package :

Ø  About 800 million people will get free cereals and cooking gas

Ø  Cash through direct transfers for three months.

Ø  Rs 1,000 ex-gratia payment to nearly 30 million poor senior citizens, widows and disabled

Ø  Insurance coverage of as much as Rs 50 lakh each for about 2 million healthcare workers battling the disease.

Ø  Relief to construction workers

Ø  First installment of Rs 2,000 under the Pradhan Mantri Kisan Yojana will be frontloaded to reach 87 million farmers in April.

Ø  Increase in MANREGA wages from Rs 182 to Rs 202 per day

Ø  Rs 500 / month to 200 million women Jan Dhan account holders for 3 months

Ø  Rs 20 lakh collateral-free loan to women SHG ( Self Help Groups )

FOR ORGANIZED SECTOR :

Ø  Govt to contribute EPF to companies with less than 100 workers

Ø  Contribution for both employer and employee

Ø  Non-refundable advance of 75 % or 3 months’ wages, from PF account

There was no way , such a pittance could help generate “ DEMAND “

In the meantime, with factories closed , SUPPLY has just stopped !  Inflation has started !

To balance both , we need :

Ø  Workers to return to factories and re-start the machines  –  SUPPLY side

Ø  People to start working / earning  wages / start buying things – DEMAND side

In short, moving from a STANDSTILL economy to a SWINGING economy

But , with a GRADUAL lifting of lockdown, such a move will also need to be GRADUAL as follows:

Ø  “ Few Machines Working “ to “ Some Machines Working “ to  “ All Machines Working “

Ø  “ No Supply “ to  “ Some Supplies “ to  “ Full Supplies “

  

Ø  “ No Purchasing Power “ to “ Some Purchasing Power “ to “ Consumer Disposable Surplus “

Ø  “ No Buying “ to  “ Some Buying “ to  “ Buy All You Need “

While such a GRADUAL SHIFT takes place over a period of next 12 weeks , here is what Government should do to make this SLOW TRANSITION, as painless as possible :

Ø  For 2020 – 21 , only 50 % of the Personal Income to be taxed for individual tax payers

{  Revenue loss =  Rs  3 lakh*Crore }

https://www.indiatoday.in/business/budget-2020/story/govt-stares-at-tax-shortfall-of-rs-2-lakh-crore-room-for-personal-income-tax-relief-limited-1640397-2020-01-27

Ø  For Corporate, 25 % of salaries/wages paid during July – Aug – Sept , to be borne by Govt

-  Only to those Corporate , which implement by end-May , Mobile based Attendance System as described at :

          From BAD to MAD                   [ 01 June 2016 ]

          MAD goes to Mandi                  [ 02 Jan 2020  ]

 

Ø  Amounts of donations made to PM-CARES fund to be treated towards CSR obligations with provision for carry forward any excess amount

Ø   No GST for goods sold during July – Aug – Sept ( assuming production will reach normal level by June end )

{  Revenue loss =  Rs 3 lakh*Crore }

Ø  Since above-mentioned benefits will drain the government exchequer, leaving very little funds for planned Infrastructure, I strongly urge the Government to issue  ELEPHANT BONDS , with modifications as described at :

              Congratulations, Shri Surjit Bhallaji,            [ 31 Oct 2019 ]

Only yesterday, EU countries have started debating issue of CORONA BONDS to help out the countries worst affected by this crisis ( viz: Italy – Spain – UK – France )

QUESTION :

As far as India is concerned, the Government is faced with a “ Trade-Off “ between :

Ø   
     Saving lives through a gradual / phased out lifting of lockdown,  

     

    AND

Ø   

    Getting back to NORMAL economic activities , as fast as possible , with minimum   hardship to citizen

QUO VADIS ?  Which way should we take ?

I hope , following diagram will help our Policy Makers to quantify the PROS and CONS of each of their alternatives

With regards

Hemen Parekh

09 April 2020

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