Answers
to Questions received from, Shantanu Nandan Sharma, Senior Editor, The Economic
Times
Q1.
Do you feel the green and orange zones will be able to fire up the
economy?
A1:
The division of the country into COVID threat zones is appropriate for issues
of "Social Lockdown" and severity & strictness of Physical
Distancing rules and regulations for society during the Pandemic. Policy
formulation requires that primary focus be on the distinction between MMCAS
(Manufacturing, mining, construction & Allied Services) and the Contact
Services (Tourism, hospitality, retail trade). The division into color zones is
suitable for Contact Services, but not MMCAS. Differential treatment of MMCAS
in different color zones will fragment the supply chains and create localized
supply-demand imbalances which will slow recovery.
Q2.
Should the lockdown be further relaxed to boost the economy? What should
be done in industrial/commercial hubs in the COVID-hit red districts.
A2:
We estimate that MMCAS constitutes about 50% of total GVA and about 35% of
employment. This segment of economy must be freed up entirely, even in red
zones, but with stricter physical distancing, and testing requirements for employers,
employees, and customers (in red zones). This will ensure that national
function smoothly, while restricting physical contact within red zones and
between red zones and other. This is critical to smooth and quick recovery of
the National economy.
Q3.
As migrant workers are leaving the industrial hubs, do you foresee a situation
of labor shortage in the short term?
A3:
Migrant worker with families in villages, go back every year, form urban and
industrial locations, to help their families with harvesting. In 2020, some
left in late March, but others were stranded when the lockdown became much
stricter in April. Even those who do not migrate every year during the
harvesting season, wanted to return, as economic activity was shut by the
lockdown. If State Govts plan appropriately, and Union govt helps coordinate
between states, migrant workers will happily return to industrial or commercial
hubs, when economic activity resumes and job opportunities re-emerge. Co-ordination
between Government, industry, and Social organizations would greatly facilitate
the matching of demand & supply for migrants during the transition period
when information is scarce and public transport must be specifically allowed/arranged.
Q4.
What is your immediate prescription for the Indian economy?
A4:
One, State Govts must ensure that no one starves because of Govt mandated
lockdown. The best way to do this during a Pandemic (deadly communicable
disease) is through an Aadhar linked, mobile payments based, direct cash
transfer system, which puts money directly into the hands of every poor women
in every habitation/village. Union Govt can help States & UTs expedite the
setting up of such a system. Two, Union Govt, along with RBI, must ensure that
there is no epidemic of mass bankruptcies; All legal financial obligations of
private industry & commerce to Govt, must be suspended during the lockdown
& the transition to normalcy. On the other hand, govt must clear all its
dues quickly as this helps private sector w/o worsening fiscal sustainability.
Three, Union & State Govts must over the next 9 months( up to and including
the next budget), roll out a series of reforms in every area & every sector
under their constitutional authority (tax, expenditure, agriculture, land, labor,
external, skilling, bureaucratic controls, construction, legal, textiles). This
will be critical to reducing the economic losses during FY21 and quick recovery
of economy in FY22, to India's growth potential.
Q5.
Anything you would like to add?
A5: Conventional discussions of
fiscal policy, sound to me like a Kabuki on TV theater. Any conventional
discussion of stimulus is meaningless when 60% of the economy is shut down by
Government Fiat and we can only produce, sell and buy, essential commodities (40%
of GVA, 55% of employment) . Even the poorest person, would not be able to
spend his full normal income as nothing else can be bought. The saving rates of
Govt servants and salaried professionals, who are getting their full salary,
has likely doubled, or tripled.
Post lockdown there will be a
transitional period during which, the issue of Bankruptcy resulting from
asymmetric legal obligations and Force Majeure, will become acute. State
Governments and courts should not add to the problem by ordering firms to pay 100%
of salary and wages to 100% of their employees. A fair and reasonable
compromise is to temporarily reduce wages to the point that all can meet their
essential requirements, but no more.
Most of the increase in Fiscal
Deficits of States and Union Govt in FY21, will occur from a decline in
government revenues due to zero economic activity during shutdown & the
transition to normalcy. This is known to macro-tax experts as an
"Automatic Stabilizer". In the Global financial crisis (when I was
CEA) this constituted ~1/3rd of the "fiscal stimulus". In the
pandemic crisis this may constitute half to 2/3rd of the increase in fiscal
deficit. There also be will be a simultaneous slowdown of govt development
expenditures due to lockdown. This provides a golden opportunity for revenue
negative tax (GST, PIT/DTC) and expenditure (Subsidy & Welfare transfer)
reform.
Last,
but not least, the collapse of Global supply chains due to the Pandemic, has a
big silver lining for India. It provides a once in a century opportunity to
attract Global supply chains to India, by increasing our competitiveness. Both
Union and State Governments must implement the well-known and long pending
reforms of labor, land, agriculture, external sector, and other reforms.
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