COVID-19 came as a total surprise and shock to all parts of the world. This is the first time in modern history all the countries in the world and all sectors are affected in a big way. To overcome this crisis the focus areas of governments will be Health Policy, Fiscal Policy, Monetary Policy and Financial Policy. They have to adopt policies, both conventional and unconventional and they need to do whatever is required to manage the crisis. Since there are no proven solutions, bold policies have to be implemented without loss of much time.
Considering the severity of the situation, Governments across the world were very fast in their response and have brought out several measures to support the Industry, especially the corporate sector. US ($ 2 trn), Germany ($ 1.3 trn), Japan ($ 990 bn) and Europe allocated large resources of unprecedented magnitudes to address this situation and brought out many measures addressing the need of various segments of the society, corporates and Individuals. The focus is on lives and livelihoods. IMF projection for India is a positive 1.9%, the highest for a large economy in the world. Considering the present trends, India will certainly have a negative growth in the first quarter and similar trend in the second quarter. If the lockdown continues beyond May, this fiscal, India is likely to have a negative growth.
Realising the need for immediate response, Indian government also acted very fast to manage this pandemic. In the first round, Rs. 1.7 trillion was announced and in the second tranche Rs. 1 trillion to improve the liquidity in the economy and alleviate the troubles faced by various segments of the society. The government is likely to come up with many more measures going forward.
In an unprecedented crisis like this, the Government has a major role to play in reviving the economy. The crisis management/stimulus measures, can be considered in terms of: 1) where no investment is required (relaxing regulations, giving guarantees, waiving of tax dues to government and measures which will not require government to spend money), 2) with little investments (within the budget available) 3) with large investments (like the ones announced so far). At present, the capacity of the private sector and financial sector of India are limited and the government has to come to the rescue.
A new SPV could be created, to raise Corona Bonds, which will be subscribed by RBI, LIC and PSU Banks with high liquidity (like SBI). This money could be utilised to invest in the additional equity of large Private sector companies and Banks, which require Capital. When the economy improves, the government can exit at a very good profit. SPV also could buy all the instruments which are rated BB and above from the market to create liquidity in the system. All financial instrument from NBFCs, Mutual funds, Insurance, Pension and Corporates could also be looked at.
Government and Government employees form a major portion of the consumer class in the society. There are more than 3 crore under Central Government, Defence, PSUs, PSBs and Pensioners. There are also local government employees. Tax/Interest concession could be given to them for buying Vehicles, Consumer Durables and Homes. They could be encouraged to utilise the LTC to support tourism and travel. Already, PSU banks announced reduction in interest for their employees to buy Homes, Consumer durables and Vehicles. Similar concessions could be given for all the government employees and PSU employees. The Government departments instead of leasing the equipments, machineries and services, they could buy them outright in large numbers.
PSUs with large cash balances and good balance sheets. The strong PSUs can be requested to draw up large capex programmes to be implemented within India. Due to budget constraints, the governments at both central and state level take a lot of time to settle bills of suppliers. Since the crisis has aggravated the issue of liquidity, the Governments and Government departments could settle the dues to all the pending private companies within 30 days.
Sectors across the country faced many issues in keep their competitiveness intact. There were many new regulations implemented at regular intervals, which have affected the competitiveness of industries. For a period of two years, the regulation relating to conduct of business could be simplified, which will not cost much. The rules could be simplified.
Economic growth will be very important to overcome the crisis. By focussing on Industry and Economy growth, government would be able to kick-start the economy and the aggregate demand will rise. The higher industry and economic growth will lead to higher tax collections.
Like in other countries, most of the required funds could be mobilised through money printing. This is called Modern Monetary theory. Government could create a Sovereign crisis Management fund and the Main subscriber will be RBI followed by SBI, LIC and PSU banks. Foreign investors also could be allowed to invest at 4% interest and the exchange risk could be borne by them. Government could invest the money in additional equity of large banks including private sector, large companies which are creating lot of employment opportunities. This will help to achieve a positive economic growth. In the next two years the government can exit these investments with good profit. Also resources from Institutions like IMF, World Bank and ADB, funds are available for long term at very concessional rates could be availed.
Considering the fact that India has a very strong domestic Economy, the above mentioned measures will boost the Consumer confidence, Business confidence, Investor confidence resulting in higher productive activities in the Economy, higher consumption, higher investments, leading to higher GDP growth, Higher Tax collections and better government finances in the medium term.
The writer is Head, Corporate Performance Management, Hinduja Group. Views are personal.