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Subject: Economics

  • Dressing a wounded economy

    Context

    There are going to be the economic impact of the actions designed to combat the virus. The two major tools that the government has available before it are monetary policy and fiscal actions.

    Impact of virus and additional slowdown

    • The impact of the coronavirus pandemic is now felt by almost every country.
    • First, there are the health effects of the virus.
    • Second is the economic impact of the various actions that have to be taken to combat the virus.
    • The world is experiencing an additional slowdown on top of the contracting tendencies already present and India is no exception.
    • The economic impact on India can be traced through four channels: external demand; domestic demand; supply disruptions, and financial market disturbances.

    Impact on export

    • As the economies of the developed countries slow down (some people are even talking of recession), their demand for imports of goods will go down.
    • This lower demand will affect our exports which are even now not doing well.
    • In fact, after six months of negative growth, it was only in January that Indian exports showed positive growth.
    • The extent of decline will depend on how severely the other economies are affected. Not only merchandise exports but also service exports will suffer.
    • Besides these, the IT industry, travel, transport and hotel industries will be affected.

    Oil price factor

    • The only redeeming feature in the external sector is the fall in oil prices.
    • India’s oil import bill will come down substantially.
    • But this will affect adversely the oil-exporting countries which absorb Indian labour. Remittances may slow down.

    Supply disruption

    • To ward off the spread of the coronavirus, the government has declared a lockdown of the country.
    • As passengers travel less, the transportation industry, road, rail and air, is cutting down schedules, sometimes drastically.
    • This will affect in turn several other sectors closely related to them. The laying off of non-permanent employees has already started.
    • As people, in general, buy less, shops stock less, which in turn affects production.
    • Perhaps retail units will be first to be affected and they will, in turn, transmit this to the production units.
    • One is unable to make an estimate of the reduction in economic activity at this point.
    • If the situation is not reversed soon, there can be a serious decline in the growth rate during 2020-21.
    • Supply disruptions can occur because of the inability to import or procure inputs.
    • The break in supply chains can be severe. It is estimated that nearly 60% of our imports are in the category of ‘intermediate goods’.
    • Imports from countries which are affected by the virus can be a source of concern.
    • The domestic supply chain can also be affected as the inter-State movement of goods has also slowed down.

    Financial market issue

    • Financial markets are the ones which respond quickly and irrationally to a pandemic such as the coronavirus pandemic. The entire reaction is based on fear.
    • The stock market in India has collapsed. The indices are at a three-year low.
    • Foreign Portfolio Investors have shown great nervousness and the safe haven doctrine operates.
    • In this process, the value of the rupee in terms of the dollar has also fallen.
    • The stock market decline has a wealth effect and will have an impact on the behaviour of particularly high wealth holders.
    • How does the government deal with this sudden decline in economic activity which has come at a time when the economy is not doing well? The two major tools that are available are monetary policy and fiscal actions.

    Two major tools with government- Monetary Policy and Fiscal Action

    • Monetary policy: In a situation like this can only act to stimulate demand by a greater push of liquidity and credit.
    • The policy rate has already been brought down by 135 basis points over the last several months. There is obviously scope for further reduction.
    • But our own history, as well as the experience of other countries, clearly show that beyond a point, a reduction in interest rates does not work.
    • It is the environment of the overall economy that counts. Credit may be available. But there may not be takers.
    • Any substantial reduction of policy rate can also affect savers. Interest is a double-edged sword.
    • What the RBI needs to do? IT needs to go beyond cutting the policy rate.
    • A certain amount of regulatory forbearance is required to make the banks lend.
    • Even commercial banks on their own will have to think in terms of modifying norms they use for inventory holding by production units.
    • Repayments to banks can be delayed and the authorities must be willing to relax the rules.
    • Any relaxation of rules regarding the recognition of non-performing assets has to be across the entire business sector.
    • The authorities must be ready to tighten the rules as soon as the situation improves. This is a temporary relaxation and must be seen as such by banks and borrowers.
    • Fiscal Policy: Fiscal actions have a major role to play. Once again, the ability to play a big role is constrained by the fact that the fiscal position of the government of India is already difficult.
    • Even without the pandemic, the fiscal deficit of the Central government will turn out to be higher than that indicated in the budgets for 2019-20 and 2020-21.
    • Revenues are likely to go down further because of the virus-related slowdown in economic activity.
    • In this context, the ability to undertake big-ticket expenditures is
    • But there are some ‘musts’. The virus has to be fought and brought down. All expenditures to test and to take care of patients must be incurred.
    • Now that private hospitals are allowed to test, the cost of the people going to private hospitals must also be met by the government.
    • The involvement of private hospitals has become necessary. It is mentioned that a test costs â‚č4,500. The total cost can be substantial if the numbers to be tested run in the thousands and more.
    • This may sound exaggerated. But we must be prepared so that we avoid the tragedy of Italy.
    • Therefore, the first priority is to mobilise adequate resources to meet all health-related expenditures which includes the supply of accessories such as masks, sanitisers and materials for tests.
    • The challenge is not only fiscal but also organisational.

    Mitigating the impact on the job sector

    • Serious concerns have been expressed about people who have been thrown out of employment. These are mostly daily-wage earners and non-permanent/temporary employees.
    • In fact, some of the migrant labour have gone back to home States. We must appeal to the business units to keep even non-permanent workers on their rolls and provide them with a minimal income.
    • Some relief can be thought of by the government for such business units even though this can be misused.
    • However, in general, in the case of sectors such as hospitality and travel, the government can extend relief through deferment of payments of dues to the government.
    • Issues in making cash transfer universal: There is talk of providing cash transfer to individuals. There is already a programme for rural farmers with all the limitations.
    • For a system of cash transfer to be workable, it has to be universal.
    • At this moment when all the energies of the government are required to combat the virus, to institute a system of universal cash transfer will be a diversion of efforts.
    • The burden on the government will depend upon the quantum of per capita cash transfer and the length of the period.
    • The government should advise all business units not to retrench workers and provide some relief to them to maintain the workers.
    • A supplemental income scheme for all the poor can be thought of once the immediate problem is resolved.
    • Provision of food and other essentials must be made available to the affected as is done at the time of floods or drought. States must take the initiative.

    Conclusion

    The fiscal deficit is bound to go up substantially. The higher borrowing programme will need the support of the RBI if the interest rate is to be kept low. The monetisation of the deficit is inevitable. The strong injection of liquidity will store up problems for the next year. Inflation can flare-up. The government needs to be mindful of this. All the same, the government must not stint and go out in a massive way to combat the virus. This is the government’s first priority.

  • PM Gareeb Kalyan Scheme

    Union Finance Minister has announced the Pradhan Mantri Garib Kalyan Scheme, under which the government would provide a relief package of Rs 1.7 trillion to the underprivileged, poor and migrant workers affected by a lockdown amid the Covid-19 crisis.

    PM Garib Kalyan Scheme

    • PM Gareeb Kalyan scheme is to have two parts — cash transfer and food security.
    • The package aims to take care of the welfare concerns of the poor and migrant workers who have been suffering because of a nationwide lockdown.

    Two silos of the scheme

    1) PM Gareeb Kalyan Anna Yojana

    • 800 million poor people in the country to get 5 kg of rice/wheat per month free of cost, in addition to the 5 kg they already get.
    • Additionally, each household to get 1 kg of preferred dal for free for the next three months

    2) Cash transfer scheme

    It has nine sub-parts

    • Farmers: First instalment of the PM-KISAN payment of Rs 2,000 to be frontloaded; move to benefit 87 million
    • MGNREGS: Wage increased from Rs 182 to Rs 202 per day. A wage increase to benefit 50 million families, as there will be about 2000 increase in their income
    • Poor widows, aged, and divyang: Ex-gratia of Rs 1,000 for the next three months, in two instalments. 30 million people to benefit. transfers to be done through direct benefits transfer (DBT)
    • Women with Jan Dhan Yojana accounts: 200 million to benefit from Rs 500 ex-gratia for the next 3 months
    • Beneficiaries of the Ujjwala scheme: 80 million households benefit from the gas cylinders provided under the scheme. These beneficiaries will get free cylinders for three months in view of the disruption the coronavirus lockdown will cause.
    • Women in self-help groups: 6.3 million SHGs get up to Rs 10 lakh collateral-free loans under the Deen Dayal Upadhyaya National Rural Mission scheme. The cap has been doubled to Rs 20 lakh. The move will benefit 70 million households
    • Organised sector workers: Two parts to this. First, the Government of India will pay the EPF contribution of both employee and employer for the next three months. This will be for all those establishments which have up to 100 employees, 90 per cent of whom earn less than Rs 15,000 a month
    • Construction workers: States to be directed to utilise the Rs 31,000 crore welfare fund for building and construction workers for the benefit of 35 million workers in the midst of the coronavirus crisis
    • District mineral fund: State govts. to be urged to utilise this fund for medical screening, medical testing and providing health care services in the wake of the coronavirus crisis

    Other initiatives

    • Insurance cover for healthcare workers attending to Covid-19 patients: Rs 50 lakh per person.
    • Two million health workers to benefit from the insurance scheme.
    • In what will benefit 8 million employees and 400,000 establishments, the EPFO regulation will be amended to allow the withdrawal of up to 75 per cent of their corpus as non-refundable advance, or three months’ salary, whichever is less.

  • MSP for Minor Forest Produce Scheme

    The Union government’s ‘mechanism for the marketing of minor forest produce (MFP) through minimum support price (MSP) and development of value chain for MFP’ scheme can offer respite to forest-dependent labourers in the wake of novel coronavirus (COVID-19) outbreak, according to experts.

    About MSP for MFP Scheme

    • The scheme, launched by the Centre in August 2013, provides fair price for MFP collected by tribals through MSP.
    • It is designed as a social safety net for improvement of livelihood of MFP gatherers by providing them fair price for the MFPs they collect.
    • MFP comprises all non-timber forest produce of plant origin such as bamboo, brush wood, stumps, cane, tussar, cocoons, honey, wax, lac, tendu or kendu leaves, medicinal plants and herbs, roots, tubers, etc, according to the Forest Rights Act, 2006.
    • The Scheme was been implemented in eight States having Schedule areas as listed in the Fifth Schedule of the constitution of India.
    • From November 2016, the scheme is applicable in all States.

    Issues in implementation

    • Almost 60-70 per cent income of forest dwellers depends on collection and sale of MFP, according to the tribal affairs ministry.
    • However, the scheme has not been activated because in most cases, states have not given their 25 per cent share.

  • [pib] Capital to Risk Weighted Assets Ratio (CRAR)

    The Cabinet Committee on Economic Affairs has given its approval for continuation of the process of recapitalization of Regional Rural Banks (RRBs) by providing minimum regulatory capital to RRBs which are unable to maintain minimum Capital to Risk weighted Assets Ratio (CRAR) of 9%, as per the regulatory norms prescribed by the RBI.

    What is CRAR?

    • CRAR also known as Capital Adequacy Ratio (CAR) is the ratio of a bank’s capital to its risk.
    • CRAR is decided by central banks and bank regulators to prevent commercial banks from taking excess leverage and becoming insolvent in the process.
    • The Basel III norms stipulated a capital to risk-weighted assets of 8%.
    • In India, scheduled commercial banks are required to maintain a CAR of 9% while Indian public sector banks are emphasized to maintain a CAR of 12% as per RBI norms.
    • It is arrived at by dividing the capital of the bank with aggregated risk-weighted assets for credit risk, market risk, and operational risk.
    • RBI tracks CRAR of a bank to ensure that the bank can absorb a reasonable amount of loss and complies with statutory Capital requirements.
    • The higher the CRAR of a bank the better capitalized it is.

    Why recapitalize RRBs?

    • RRBs are primarily catering to the credit and banking requirements of agriculture sector and rural areas with focus on small and marginal farmers, micro & small enterprises, rural artisans and weaker sections of the society.
    • A financially stronger and robust RRB with improved CRAR will enable them to meet the credit requirement in the rural areas.
    • As per RBI guidelines, the RRBs have to provide 75% of their total credit under PSL (Priority Sector Lending).
    • In addition, RRBs also provide lending to micro/small enterprises and small entrepreneurs in rural areas.
    • With the recapitalization support to augment CRAR, RRBs would be able to continue their lending to these categories of borrowers under their PSL target, and thus, continue to support rural livelihoods.

    Back2Basics

    Regional Rural Banks (RRBs)

    • RRBs are Scheduled Commercial Banks operating at regional level in different States of India. They are recognized under the Regional Rural Banks Act, 1976 Act.
    • They have been created with a view of serving primarily the rural areas of India with basic banking and financial services.
    • However, RRBs may have branches set up for urban operations and their area of operation may include urban areas too.
    • The area of operation of RRBs is limited to the area covering one or more districts in the State.

    Their functions

    RRBs also perform a variety of different functions. RRBs perform various functions in following heads:

    • Providing banking facilities to rural and semi-urban areas
    • Carrying out government operations like disbursement of wages of MGNREGA workers, distribution of pensions etc.
    • Providing Para-Banking facilities like locker facilities, debit and credit cards, mobile banking, internet banking, UPI etc.
    • Small financial banks etc.

  • [pib] Bio-fortified wheat variety- MACS 4028

    Scientists from Agharkar Research Institute (ARI), Pune, an autonomous institute under the Department of Science & Technology have developed a biofortified durum wheat variety MACS 4028, which shows the high protein content.

     MACS 4028

    • MACS 4028 is a semi-dwarf variety, which matures in 102 days and has shown the superior and stable yielding ability of 19.3 quintals per hectare.
    • It is resistant to stem rust, leaf rust, foliar aphids, root aphids, and brown wheat mite.
    • It has a high protein content of about 14.7%, better nutritional quality having zinc 40.3 ppm, and iron content of 40.3ppm and 46.1ppm respectively, good milling quality and overall acceptability.
    • The MACS 4028 variety is also included by the Krishi Vigyan Kendra (KVK) programme for  UNICEF to alleviate malnutrition.

    Back2Basics

    Biofortification is the idea of breeding crops to increase their nutritional value. This can be done either through conventional selective breeding, or through genetic engineering.

     

  • Kurzarbeit Scheme

    Amid the all-round disruption caused to the economy by the novel coronavirus outbreak, a concern across the world is the possibility of a loss of jobs. Various governments have unveiled various measures to address such concerns, and one of the most talked-about is Kurzarbeit.

    Kurzarbeit Scheme

    • Kurzarbeit is German for “short-work”.
    • The policy provides for a short-time work allowance, called kurzarbeitgeld, which partially compensates for lost earnings during uncertain economic situations.
    • The policy was rolled out during the 2008 economic crisis while its origins date back as far as the early 20th century, before and after World War I.

    How it works?

    • When companies face a loss of earnings due to unforeseen economic situations, they often need to cut back on their working hours or send some of their employees’ home.
    • It aims to address workers who are impacted by the loss of income due to shortened work hours during such times.
    • They can apply for short-term work benefits under the scheme, with the government stepping in to pay employees a part of their lost income.

    Quantum of payment

    • Payment under Kurzarbeit is calculated on the basis of a net loss of earnings.
    • As per Germany’s Federal Agency for Work, short-time employees generally receive about 60 per cent of the flat-rate net wage.
    • In case there is at least one child in the house of the short-time worker, he/she receives 67 per cent of the flat-rate net wage.

    Benefits

    • This scheme helps the companies retain their employees instead of laying them off, and allows the latter to sustain themselves for a period of up to 12 months.

  • India VIX Index

    The  India VIX Index, an indicator of the volatility of the stock market has been plunging after the outbreak of novel coronavirus.

    What is Volatility Index?

    • Volatility Index is a measure of the market’s expectation of volatility over the near term.
    • Volatility is often described as the “rate and magnitude of changes in prices” and in finance often referred to as risk.
    • It is a measure, of the amount by which an underlying Index is expected to fluctuate, in the near term, (calculated as annualized volatility, denoted in percentage e.g. 20%) based on the order book of the underlying index options.

    India VIX Index

    • India VIX is a volatility index based on the NIFTY Index Option prices.
    • From the best bid-ask prices of NIFTY Options contracts, a volatility figure (%) are calculated which indicates the expected market volatility over the next 30 calendar days.
    • “VIX” is a trademark of Chicago Board Options Exchange, Incorporated (“CBOE”) and Standard & Poor’s.
    • The firm has granted a license to NSE to use such mark in the name of the India VIX and for purposes relating to the India VIX.

  • Welcome Policy On APIs, Devices

    Context

    It is most welcome that the Centre has announced a `14,000-crore incentive package to boost the manufacture of drugs, especially active pharmaceutical ingredients (API).

    What should be the immediate policy focus?

    • Focus on protective gear: The immediate policy focus must be to swiftly overcome shortages of critical protective gear like gowns and face masks, diverting production lines if required.
    • We also need to anticipate and step-up production of vital devices like ventilators.
    •  Provisions in the package: What is proposed now are industrial parks for bulk drugs and APIs, together with a policy for multi-year fiscal benefits. And ditto for parks for the manufacture of medical devices and attendant fiscal incentives.
    • The state governments need to identify 1,000 acres for the parks that are well-integrated with knowledge centres and nationally accredited labs.

    What additions need to be made in the package?

    • Public-private partnership: In tandem, the pharmaceuticals package issued on Saturday needs to be followed through, with a forward-looking public-private partnership, to avoid import-dependency in this critical sector.
    • What is envisaged is a set of schemes to reap economies of scale and ready availability of inputs in the production of APIs and medical devices via the cluster approach.

    How India became uncompetitive in API?

    • Policy rigidities and price controls: APIs are, of course, bulk drugs that provide medicines with their therapeutic value, and it is unfortunate that since circa 1995, India has become steadily uncompetitive in API production, thanks to a panoply of policy rigidities such as onerous price controls.
    • Export competition from China: Opaque export competition from China has been game-changing indeed: APIs for most medicines are mostly imported.
    • This needs to change, fast. We do need to competitively and efficiently boost output of pharmaceuticals right across the value chain.

    Conclusion

    The government must understand that manufacture by itself is not enough. The policy must ensure competition and quality, keep prices down.

  • Govt. has raised excise duty cap on fuel

    In a move which would help the government to raise excise duty on fuel further in future, the government has raised the cap on special additional excise duty on petrol and diesel. These changes are as per the amendments in the Finance Bill passed in the Parliament.

    Why such move?

    • Government is increasing duties on petrol and diesel to raise revenues in view of a tight fiscal situation.
    • Slump in global crude oil prices, alongside possibility of a global economic recession, has forced the government to look for avenues to raise revenues to support growth.
    • With major companies going for production shut downs, industry players have suggested the government to boost fiscal stimulus in the wake of demand collapse triggered by the coronavirus.
    • Earlier, Saudi Arabia had triggered the crash in prices by announcing a sharp increase in oil production after Russia declined to reduce oil supply to contain a fall in oil prices due to declining demand in a meeting of petroleum exporting countries.

    Impact of the move

    • Every rupee hike in excise duty is expected to yield roughly Rs 13,000-14,000 crore annually.
    • The slump in global crude oil prices enables the government to raise these duties substantially without immediately putting the burden on the consumer.
    • But there is expected to be a demand slowdown for fuels with a nearly country wide lockdown in the wake of coronavirus.
    • With airlines, railways, trucks and passenger cars going off the roads, petrol, diesel and ATF (aviation turbine fuel) consumption is expected to fall drastically.

    Back2Basics

    What is Excise Duty?

    • Excise duty is a form of tax imposed on goods for their production, licensing and sale.
    • It is the opposite of Customs duty in sense that it applies to goods manufactured domestically in the country, while Customs is levied on those coming from outside of the country.
    • At the central level, excise duty earlier used to be levied as Central Excise Duty, Additional Excise Duty, etc.
    • Excise duty was levied on manufactured goods and levied at the time of removal of goods, while GST is levied on the supply of goods and services.

    Purview of excise duty

    • The GST introduction in July 2017 subsumed many types of excise duty.
    • Today, excise duty applies only on petroleum and liquor.
    • Alcohol does not come under the purview of GST as exclusion mandated by constitutional provision.
    • States levy taxes on alcohol according to the same practice as was prevalent before the rollout of GST.
    • After GST was introduced, excise duty was replaced by central GST because excise was levied by the central government. The revenue generated from CGST goes to the central government.

    Types of excise duty in India

    Before GST kicked in, there were three kinds of excise duties in India.

    Basic Excise Duty

    • Basic excise duty is also known as the Central Value Added Tax (CENVAT). This category of excise duty was levied on goods that were classified under the first schedule of the Central Excise Tariff Act, 1985.
    • This duty was levied under Section 3 (1) (a) of the Central Excise Act, 1944. This duty applied on all goods except salt.

    Additional Excise Duty

    • Additional excise duty was levied on goods of high importance, under the Additional Excise under Additional Duties of Excise (Goods of Special Importance) Act, 1957.
    • This duty was levied on some special category of goods.

    Special Excise Duty

    • This type of excise duty was levied on special goods classified under the Second Schedule to the Central Excise Tariff Act, 1985.
    • Presently the central excise duty comprises of a Basic Excise Duty, Special Additional Excise Duty and Additional Excise Duty (Road and Infrastructure Cess) on auto fuels.

  • How policy can bridge the gap

    Context

    India must use the windfall from oil to provide assistance to the most vulnerable to mitigate the impact due to COIVD-19 outbreak.

    Estimates of impact

    • Impact on major economies: Minus 40 per cent, -30 per cent, -22 per cent, and -14 per cent. These are the estimated impacts (at an annualised rate) on the quarterly growth rates of China, the UK, Eurozone, and the US because of the Covid-19 virus.
    • Even excluding China and those that are closely tied to its supply chain — Korea and Taiwan — emerging markets (EM) are expected to go into recession in the first half of 2020, with the second quarter taking the biggest hit at over an 8 per cent quarterly decline.
    • Impact on India: India will not be spared this growth shock. In fact, the economic impact could be deeper and longer in emerging markets where the capacity of public health systems is limited at the best of times.

    Prospects of recovery

    • Sudden stop to economic activity: We also know from the experiences of the countries already infected that the way to control the spread of the virus is through aggressive containment and social distancing that inevitably brings economic activity to a sudden stop.
    • There doesn’t seem to be a middle path. We also know that unlike natural catastrophes like earthquakes, capital stock is not destroyed by the virus.
    • Sharp recovery and conditions: Once the containment period is over and social interaction normalises, there is every reason to believe that activity can recover very sharply.
    • Unless the containment period is long because of capacity constraints in the healthcare system which could turn supply chain disruptions into a long-term problem, or the credit stress created by the lack of earning by households and firms during the sudden stop stymies the recovery.

    India needs to brace itself

    • Unfortunately, India, where the virus still appears to be in the early stage, needs to brace for such a sudden stop.
    • The lockdown could be for an extended period given the already stretched public health system.
    • Impact on urban economy: The swathe of the economy that depends on social interaction — retail sales, entertainment, restaurants, and importantly construction and manufacturing — is very large.
    • Even if one believes that rural areas with relatively low population densities will not be affected much, the impact on urban economic activity could be very large.

    Role of economic policy

    • What is the role of economic policy in such circumstances? It needs to “bridge the gap” between the brutal downturn and the eventual recovery.
    • While public health policies force a sudden stop in the economy to save lives, economic policies need to ensure that the impact from the shutdown is cushioned, incomes of households and firms supported, credit stress is contained, and the recovery is not hamstrung by policy headwinds.
    • This requires policy support to be operated on various fronts.
    • Role of the Central bank: Central banks not only need to cut rates but also need to provide adequate liquidity and extend regulatory forbearance to prevent credit stress and non-performing loans from clogging up the already strained financial system when the economy starts to recover.
    • Role of fiscal policy: The role of fiscal policy is even larger, from direct and indirect tax cuts or postponement to targeted credit support for sectors that are likely to be most affected such as airlines and retail trade.
    • Support to the vulnerable: The key is income support to the most vulnerable: From daily wage earners to SMEs (small and medium enterprises).
    • Using JAM trinity for cash transfer: It is here that the government’s efforts over the last five years make India one of the best-placed economies to deliver such cash transfers.
    • Since 2015, substantial time, effort, and resources have been expended to establish Jan Dhan (bank accounts), Aadhaar and mobile banking (JAM), and Mudra, the programme that dispenses loans to SMEs.
    • The objective of JAM and Mudra is to use Aadhaar as a way of accurately identifying beneficiaries and use mobile banking to digitally and seamlessly transfer cash/subsidies directly to households’ bank accounts and provide loans to SMEs without any leakages.
    • According to government reports, the total number of Jan Dhan accounts stand at around 380 million and 59 million MUDRA loans were sanctioned last year.
    • For a country with a population of 1.3 billion and about 63 million SMEs, even if there are duplicate accounts, JAM and Mudra should be able to cover almost all households and SMEs.
    • With Aadhaar accurately targeting beneficiaries, leakages should be minimised. If there ever was a time that India needed JAM and Mudra it is now.

    Issue of fiscal space and solution

    • Some will argue that India doesn’t have the fiscal space. But it does.
    • Use oil windfall: In the last month or so, the crude oil price has dropped from around $60/bbl to around $30 and is likely to stay at this level given the breakdown in agreement among oil-producing countries and the massive collapse in global demand.
    • If the government simply taxed the oil windfall by raising excise duties, as it did during the 2014-15 oil price collapse, it could potentially raise almost 1 per cent of GDP or a staggering Rs 2.25 trillion.
    • If 50 million households have to be provided assistance because of the shutdown, it comes to about Rs 14,000 per month for three months or about Rs 24,000 a month to half of the 63 million SMEs.
    • And this without even having to increase this year’s budgeted deficit.

    Conclusion

    The government might have other uses for the oil windfall. But if India is forced into lockdown, the economic costs will be very large and the recovery will crucially depend on whether the pilot-light of the economy is kept lit through this period. This critically requires income transfers to vulnerable households and SMEs. India cannot complain that it does not have the fiscal space or the infrastructure to provide it.