Is there a case for a Covid budget? (2024)

This is the first of a multi-article series written by economists and sectoral experts on the path India must take to survive the Covid crisis.

By Ram Singh

Is there a case for COVID Budget?
Ram Singh, Professor, Delhi School of Economics

Economic costs of COVID19 are going to be high and widely spread. Even if the world economy is lucky to see a recovery in the second half of the year, the IMF estimates that pandemic will shrink world output by at least 3%. To mitigate the economic costs of the disease rich countries have rolled out huge fiscal and monetary packages. On average the developed economies are looking at fiscal deficits upward of 11% of their gross domestic products (GDP).

In India, a timely executed lockdown has helped in flattening of the COVID curve, saving many lives. The process, however, has put brakes on the economic engine. Rating agencies Fitch and Moody’s have slashed growth forecasts for FY 21 to 0.8%, to 0.2%, respectively. To revive, the economy needs a raft of fiscal and monetary measures.

According to several commentators and business groups, the economy needs a large fiscal stimulus similar to the ones rolled out by rich countries. The recommendations range from - Rs 10-15 trillion, that is, 5-7.5% of India’s GDP. A few experts have pitched for a separate Covid-19 budget. A separate budget, it is argued, will comfort the rating agencies by ring-fencing the pandemic related expenditure. Reportedly, the government is toying with the idea of a Covid budget.

In just one month of fiscal year 2020-21 (FY 21), estimates in the current budget have been rendered meaningless. For instance, the centre has already lost more than Rs 28,000 crore in the auto sector that contributes 15% of its total GST collections. The government finances have been turned upside down. There is huge uncertainty about the economic fallouts of the pandemic. So, it is almost impossible to arrive at meaningful estimates of the revenue and expenditures.

To nudge the government toward the fiscal discipline path as soon as the crisis is over, it is a good idea to separate out Covid related spending. However, a separate budget is unnecessary and undesirable.

Reloading India

A big sized stimulus in one go is also not a good idea. Oversized stimuluses by rich countries aim to revive demand and productive activities by incentivizing employers to protect jobs and wages. Heavy fiscal dose makes sense for them as the disease already has bottomed out and many economic activities are have been resumed, in some cases with reasonable restrictions – except the civil aviation.

However, the Indian situation is very different. Suppressing of economic and other activities is the part of the Indian strategies to fight the virus. Moreover, we do not have payroll data for a large number of informal sector workers to subsidize the wages.

Even though economic activities have been permitted from May 04 in districts other than the ones with red zones where most economic activities remain banned. The problem is that the 170 red-zone districts cover most of big cities and metros that account for more than 60% national output. Besides, due to production and distribution related inter-linkages with the red zones and exodus of migrant workers to rural areas, productions and sales in the orange and green zones will remain subdued. Consequently, a large part of the economy will remain dormant in the immediate future. Even after the lockdown is lifted post-pandemic, the economy will take time to rebound.

The government’s efforts have saved many lives by containing the virus. Now, it needs to expand the set of permitted activities with appropriate fiscal support. Continuous exodus of migrants should be stopped using appropriate facilities and incentives. Due to lack of administrative permissions and inter-government agency coordination, several permitted activities such as work on in-situ projects is not being performed. The needs government attention urgently.

As to the fiscal package, beneficiaries of the first round were the BPL households, Jan Dhan account-holding women and the Ujjwala beneficiaries. Support to these groups and farmers shall continue. Urgent help is needed for micro, small, and medium enterprises (MSMEs) and non-banking finance companies (NBFCs), crucial for reviving the unorganized sector, the second largest employer after agriculture. The current account is a good metric of the size and capital requirements of MSMEs. Banks can be asked to give 100% increase in the current limits with interest rate subvention funded by the government, of course only for the duration of covid crisis. The government should clear the large dues to MSMEs and other private vendors.

The NBFCs, a lifeline for MSMEs, need a lease of life. They have stopped lending due to liquidity crisis facing them. The banks have denied many of them the benefit of moratorium. Besides, the targeted long-term repo operations round 2 (TLTRO) funds provided by the RBI can be used by banks only to buy investment grade bonds of NBFCs, and not for direct lending to them. While, the bond route is not open to small NBFCs, a risk gripped bond market has hampered fund-raising even for the top-notch non-bank lenders. Use TLTRO funds can be allowed for direct lending and relief of moratorium should be extended to them.

The next in line should be aviation, hospitality, power producers, automobiles, real estate, and logistics sectors. These sectors are among the worst hit by the lockdown, but they can be helped in a meaningful only when the economy reopens after the crisis.

The Centre will have to spend large sums to save lives and livelihoods. The required sums can be raised by monetization of the deficit or borrowing locally as well as from NRIs. However, injecting a large sum in one go is neither feasible nor desirable.

The author is Professor, Delhi School of Economics. (The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)