How India Can Rise to the Covid Challenge

Economic Times, March 31 2020

            Corona epidemic, which originated in China in December 2019, has now reached 175 out of a total of 195 countries in the world. No past pandemic has spread this widely and this fast. And we are far from seeing the proverbial light at the end of the tunnel. Until a definite cure and vaccine against the virus are found, the threat will loom.

            India too is in the midst of this calamity. An extra-ordinary challenge requires an extra-ordinary response. Thankfully, the Prime Minister has acted decisively and confidently. India is now on a 21-day lockdown. Short of this action, risks for India were huge. The Prime Minister couldn't have been more right when he said that without the 21-day lockdown, the nation risked being setback by 21 years.

            To be sure, the lockdown asymmetrically disadvantages those living hand to mouth. One can argue that even the poor can survive for a week with the help of their better off neighbors, fellow villagers and those for whom they work. But a period of three weeks without a source of income can result in starvation.

            Therefore, unsurprisingly, the 1.7 lakh crore rupees package that the Finance Minister announced focuses almost exclusively on assisting different vulnerable groups in both rural and urban India. In assessing the package, two broad points must be kept in mind.

            First, for its per-capita income, India has an elaborate network of schemes aimed at assisting the poor. Not all schemes work well. Nevertheless, with big leakages along the distribution chain in them plugged in recent years and some effective new schemes such as Ujjwala and PM-KISAN launched, the poor do have some cushion. The package just announced is on top of that cushion.

            Second, the government has shown excellent judgment in being explicit about the time-bound nature of the package. Accordingly, all benefits have the life of three months. Successive governments in India have shown great reluctance in withdrawing social programs once they have been launched no matter how inefficient they may be. But given its fiscal resources, the government can ill-afford to extend the announced benefits beyond the duration of the crisis.

            Some may argue that three months is longer than necessary since the lockdown is for only three weeks. But that view would be myopic. There is much uncertainty about how the Corona situation will evolve. The lockdown itself may have to be extended. And even if not, resumption of economic activity to pre-Corona level will take some time.

            Beyond these broad points, the key question is whether the package is good enough to help the poor tide over the hardships resulting from the lockdown. My short answer is yes. Most citizens understand that they must cut back on their needs during a national emergency. The poor are no different. As long as they and their children can get daily meals, they will gladly postpone other consumption.

            From this perspective, the most important component of the package is the provision of 10 kilogram of food grain and one kilogram of lentils per month per person under the Public Distribution System. According to household expenditure survey of 2011-12 by the National Sample Survey, the latest such survey available, monthly cereal consumption in India is below 10 kilogram per person across all income classes in urban India and between 10 and 12 kilograms in rural India.

            To turn food grains and lentils into meals, households need cooking fuel. Accordingly, the package includes a free LPG cylinder per month for three months for 83 million below poverty line households.

            Beyond the provision of meals, the package offers modest additional assistance to different vulnerable groups in both rural and urban areas. The first installment of 2,000 rupees under PM-KISAN, due in 2020-21 to 87 million farmers, will be frontloaded and transferred on April 1 2020. The government will transfer another 500 rupees per month to 200 million women in their Jan Dhan accounts. Some 30 million widows and senior citizens will receive 1,000 rupees over the next three months. State governments are to use a sum of 31,000 crore rupees available in the welfare fund for building and construction laborers to assist the latter. To help smaller enterprises and their employees, the government will cover both employee and employer EPF contributions, amounting to 24% of wages, for the next three months.

            This package and the one that would be required to assist the industry to stay afloat during the crisis are certain to test the limits of financial resources of the government at a time when it faces a severe crunch in revenues from all sources: corporate profit tax, personal income taxes, tariffs, GST and non-tax revenues. Therefore, the Finance Minister may even have to invoke the exception clause in the FRBM Act for direct funding of the government by the RBI.

            While the government takes fiscal measures necessary to minimize the pain of the people and damage to the economy, the RBI will need to safeguard financial stability. It must see to it that undue corporate bankruptcies do not add to the stress from which the financial sector is still emerging.