Issues related to Economic growth

Opportunity in the Covid-19 crisis

Note4Students

From UPSC perspective, the following things are important :

Prelims level : FRBM Act.

Mains level : Paper 3- Opportunity to bring in reform that could benefit us in the medium term as well.

Context

Coronavirus pandemic offers a trigger to fundamentally strengthen the Indian economy, and protect the vulnerable. This requires cooperation between the Centre and states.

Opportunity to do things good for the medium term

  • Minimising the impact on the vulnerable: The current crisis is so terrible in its toll of life and livelihoods that the need of the hour must be minimising the health, humanitarian and economic costs, especially for the most vulnerable.
  • Rising expenditure may force hard choices: Rising public expenditures to help tens of millions of workers and their families alongside plummeting resources will inevitably force hard choices.
  • Appropriately, much of the policy discussion and the government’s first response have focussed on addressing the immediate imperatives.

This crisis is also an opportunity to do things that are not only good for now but for the medium term as well. Few are discussed below.

1. Revamp macro-fiscal framework

  • Massive fiscal expenditure may require: If the pandemic follows the exponential trajectory seen in other countries, the crisis is going to entail massive fiscal expenditures, perhaps up to 4-5 per cent of GDP, much more than what the government has announced.
  • Macro-fiscal targets have to be exceeded: Consequently, the basic macro-fiscal framework — for example, the Centre’s FRBM target of 3.5 per cent of GDP, and the revenue and deficit estimates for 2020-21 — has been fundamentally overtaken by events.
  • Allow states to exceed deficit targets: The Centre should immediately announce that even the states will be allowed to exceed their fiscal responsibility legislation targets because they will be in the front line of taking action against the pandemic.
  • Opportunity to review the FRBM: The crisis is an opportunity to revisit the entire framework.
  • The focus on unattainable targets, the fact that the FRBM has been honoured only in the breach, and the consequences in terms of loss in budgetary integrity and transparency need serious review, even overhaul.
  • Once the crisis ebbs, India might be looking at overall deficits well in excess of 10 per cent and debt levels much greater than those today. If the starting point is going to be so different, the old goals and targets won’t retain meaning.

2. Remake finance and adopt a data-driven lending model

  • Going into the crisis, India’s corporate and financial sector were under severe stress — the so-called Four Balance Sheet problem.
  • This crisis will, unfortunately, add consumers and small and medium enterprises to that This will be an extremely hard — but critical — problem to address.
  • A takeover of bad loans will be unavoidable: To allow banks to revert to normalcy, a largescale takeover of their bad loans will be unavoidable not least because the current bankruptcy process will be severely inadequate.
  • Opt for the tech. driven lending model: This crisis opens the door for the new lending model proposed by Nandan Nilekani i.e. technology-driven lending.
  • What is Technology-driven lending? It uses data rather than collateral, allowing the 10 million-odd businesses with deep digital footprints (for example, based on GST invoices), to get loans from the thriving ecosystem of new financial players.

3. Complete JAM

  • One of the major achievements of the government was to create the plumbing — Jan Dhan, Aadhaar, and Mobile (JAM)to augment weak state capacity.
  • How JAM is proving helpful in this crisis? The state could now make cash transfers swiftly, with reduced leakages, whether as income support, scholarships or pensions, and potentially eventually implementing a Universal Basic Income.
  • In the current crisis, it is proving to be an important part of the social safety net that is helping to cushion the most adversely affected groups.
  • JAM is not complete yet: But the JAM plumbing is still incomplete because there is a “last mile problem”.
  • Not all those with bank accounts can access money either because of difficult geography or because bank functionaries give incomplete or misleading information.
  • Opportunity to fix the shortcomings: This crisis is an opportunity not just to leverage JAM to enhance cash transfers, but to empower citizens. This will require the government to identify remaining weaknesses on a war footing and fix them.

4. Re-shape Indian agriculture

  • Need to create one market for agriculture: The need to preserve supply chains in agriculture in times of crisis reinforces the need to create one market for agriculture across India.
  • This requires eliminating legislation like the Essential Commodities Act and the panoply of resulting restrictions.
  • Phase-out subsidies and opt for DBT: Second, the crisis has shown the possibilities created by JAM and direct transfers.
  • Phasing out in cycles: Building on PM-Kisan and various state-level schemes, pernicious subsidies, especially for fertilisers and power, could be phased out over 5-6 crop cycles.
  • This could be done through small but frequent increases in fertiliser prices (the technique used to eliminate fuel subsidies).

5. Focus on Make in India

  • The critical source for almost all the essential Active Pharmaceutical Ingredients (API) used to manufacture drugs, the ability also to fight death, is largely made in China.
  • India was once a major producer of such APIs but lost ground to China.
  • Frame intelligent industrial policy: The crisis should be the opportunity to go on war footing to do intelligent industrial policy — incentives, regulatory help, trade policy — that would resurrect India’s manufacturing capability.
  • Previous Make in India attempts have shown lackadaisical results.
  • Focus on the pharmaceutical sector: The crisis creates the momentum to focus the effort on one sector, pharmaceuticals. As a result, the ability to save lives could be Made in India, again.

6. Establish migrants as full citizens

  • Need to change the place-based benefits to person-based benefits: The plight of migrant workers reinforces the need to move from immobile place-based benefits to mobile person-based benefits, which is possible as the JAM infrastructure is strengthened.
  • Portability of benefits: This will require portability of benefits, including access to the PDS, Ujjwala and Ayushman Bharat.
  • The crisis has highlighted the travails of migrant labour and their second-class status.
  • The large gap between the organised and unorganised sector worker: It reflects a broader chasm between the few securely employed in the organised sector and the vast majority subject to the vicissitudes of the unorganised sector.
  • Differences not just in the levels of income but in their volatility as well as differential access to social insurance (healthcare, pensions) distinguish these two classes.

7. Upgrade Health

  • Weakest state capacity in health and education: State capacity over 70 years in India has been weakest in the areas of education and health.
  • The COVID-19 pandemic must lead to a serious strengthening of the health infrastructure for dealing with pandemics.
  • Set up an apex institution on the lines of US’s CDC: To start with, India needs an apex institution like the US’ Centers for Disease Control with a network across all the states.
  • They should invest in disease surveillance systems, set up diagnostics labs, be able to gather real-time data and analyse them etc.
  • The Taiwan model, which has been so successful in this pandemic, could be studied.
  • More fundamentally, the crisis is a wake-up call to address India’s severe limitations in the provision of basic health.
  • Focus on basic public health: Creating tertiary health facilities must be subservient to strengthening basic public health and early childhood care.

8. Build a National Solidarity Fund

  • The severe downturn in economic activity ahead will savagely hit the informal poor.
  • How would the Solidarity fund be set up? The government should consider a Solidarity Fund with a one-time annual contribution coming from the wealthy and the employees in the organised sector.
  • Contribution to the fund: This contribution can take the form of taxes or elimination of middle-class subsidies identified in the Economic Survey of 2016.
  • The wealthy could contribute via a wealth tax with thresholds set by property values say above Rs 5 crore.
  • Salaried employees in the public and private sectors could contribute via a small, progressive tax on salaries and pensions.
  • Middle-class subsidies that could be eliminated include interest and tax deductions for small savers, favourable taxation of gold and other luxuries.
  • Wealth taxes and elimination of subsidies for the rich should, in any event, be part of the long-run reform agenda to reduce growing inequality.

Conclusion

These examples illustrate how the crisis can be converted to an opportunity to fundamentally strengthen the Indian economy, and protect the vulnerable. A common thread to many of these actions — indeed prerequisites for their success — is cooperation between the Centre and states. Central direction combined with flexibility and nimbleness in the states and local bodies is India’s way through the crisis and beyond.

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