Corona attack on Union’s fragile finances

In his address to the nation on March 19, 2020, Prime Minister, Narendra Modi announced the setting up of an Economic Response Task Force [ERTF] under the union finance minister, Nirmala Sitharaman to come up with a package of measures to alleviate the problems industries, sectors, businesses and workers are facing due to the economic disruption caused by Covid – 19.

The nerve shattering Covid – 19 has come at a time when the union government is facing a huge shortfall of about Rs 200,000 crore in the tax collection vis-à-vis even the revised estimate [RE] of Rs 1400,000 crore for 2019-20 [when compared to budget estimate, the shortfall is much higher at Rs 400,000 crore] and staring at substantial shortfall even during 2020-21.

The budget for 2020-21 estimates tax revenue accruing to centre during the year of about Rs 1575,000 crore or Rs 375,000 crore higher than likely actual for 2019-20 of Rs 1200,000 crore. As it is, the target is highly unrealistic. Now, in view of the devastating effect of Covid – 19 on GDP [gross domestic product] and tax collection, this may have even gone beyond the visibility range.

Even the non-tax revenue target has gone completely haywire. At one level, the target for proceeds from disinvestment of its shareholding in public sector undertakings [PSUs] i.e. Rs 210,000 crore [of this, nearly 80% is to come from ‘strategic’ disinvestment of Bharat Petroleum Corporation Limited (BPCL) and Air India besides 10% share sale in Life Insurance Corporation (LIC)] is unlikely to be within reach. With several countries including USA in grip of economic recession, there won’t be appetite for big ticket sales.

At another level, dividend or special dividend from PSUs will be hit due to eroding bottom-lines amidst sharp deceleration in growth. That apart, unlike during 2019-20 when the government received Rs 158,000 crore bonanza from the Reserve Bank of India [RBI], the latter is unlikely to provide much succor during 2020-21.

The government is facing a double whammy. While, on one hand, its revenue from both tax and non-tax sources will be on a steep downhill, on the other, it will need to open its treasury to give relief to those devastated by large-scale shutdown.

The most seriously affected sectors such as aviation, transport, hospitality, tourism, retail, micro, small and medium enterprises [MSMEs] are looking for a host of concessions such as additional interest subvention [for instance, MSMEs are demanding 3-5% over and above 2% they are already getting], moratorium on repayment of loans and interest dues, relaxing the repayment schedules, liberalizing the norm for declaring a loan as non-performing asset [NPA] [at present, a loan is classified as NPA if it is not paid within 90 days; the demand is for increasing this to 180 days] etc.

The industry associations are also seeking reduction in the policy rate [interest rate charged by the apex bank on loans given to banks] by 50 basis points, reduction in cash reserve ratio [CRR] [portion of deposits, banks are required to keep with RBI on which they get no return] to inject more liquidity in the economy and so on. Some corporate are using this opportunity to demand abolition of long-term capital gains tax and other fiscal reliefs including in indirect taxes.

In a press conference held on March 24, 2020, while announcing a series of reliefs which are largely ‘procedural’ [such as extending the date for filing returns, reducing interest chargeable on delayed payments, exemption from penalty etc], for any major financial support, the industries and businesses will have to wait for finalization of the Covid -19 – ERTF recommendations.

However, the government needs to come up with immediate financial relief for millions of those in the ‘informal’ sector such as street vendors, craftsmen, construction workers, agricultural laborers, domestic workers, self-employed etc whose livelihood is on the edge. To gauge the extent of the requirement, let us look at this.

India’s working population is about 40 crore. Of this, 94 percent or 37.6 crore is in the informal sector. Taking national minimum wage of an informal worker at Rs 175 per day or Rs 4550 per month [26 working days in a month], for 37.6 crore workers, the direct income support in a month will be about Rs 170,000 crore. Even if the shutdown continues for 2 months [a real possibility considering the scale of crisis], this will cost the exchequer Rs 340,000 crore. Where from such mammoth sum will come?

Some experts have suggested that the government can relax the fiscal deficit target for 2020-21 by one percent which can release about Rs 220,000 crore [on projected GDP of Rs 220,00,000 crore based on nominal growth @10% over the 2019-20 level]. Further, it can leverage steep decline in the international price of crude [in just about a month, it has dropped by over US$ 30 per barrel] to increase the central excise duty [CED] on petrol and diesel by Rs 5 per litre each. This can generate an additional Rs 65,000 crore. The ideas may sound attractive.

But, these can’t be viewed in isolation from the existing fiscal position. Already, the budgeted fiscal deficit at 3.5% is 0.5% higher than the target under the Fiscal Responsibility and Budget Management [FRBM] Act. The finance minister has justified this slippage in terms of the recommendation of NK Singh committee on review of FRBM which permits breach of the target in case of “far reaching structural reforms with unanticipated fiscal implications”.

But, 3.5% by itself does not depict the real state of union’s financial health as apart from inflated tax and non-tax revenue projection [as discussed above], it does not take into account the deferred subsidy payments [DSPs], extra-budgetary resources [EBRs] etc. If, these are also included which is the way it should be [it is ironical that in an annexure in the budget for 2020-21, the existence of DSPs and EBRs is acknowledged but, these are not captured in the numbers] the actual deficit would be at least 6%.

Thus, already, the government is off the mark by 3% which includes 0.5% slippage made transparent by the finance minister and 2.5% kept non-transparent. On top of this, if now a further relaxation of 1% is permitted [to capture the Covid – 19 effect], the deficit will touch 7% – a figure last recorded in 2009-10. The implications of this in terms of increasing the cost of capital, exacerbating inflation, rating down grade and deleterious effect on growth will be horrendous.

As regards the proposal for increase in CED on petrol and diesel, we must not forget that already, from March 14, 2020, this was raised by Rs 3 per litre each. With this, the price of petrol at the pump station is Rs 70 per litre [in Delhi]. When, seen in juxtaposition with a record low price of crude at less than US$ 30 per barrel, this is bizarre. With another hike of Rs 5 per litre or even more [in fact, the government has already taken parliament’s nod for further increase in CED by up to Rs 8 per litre each any time it wishes] this anomaly will only get bigger forcing the consumers pay more when they ought not.

The exercise of these two options [1% fiscal slippage plus hike in CED by up to Rs 8 per litre] may help the government garner over Rs 300,000 crore to give money in the hands of millions in the informal sector but that will be at the cost of making India’s fiscal situation and economic fundamentals even more fragile.

This is not to suggest that in the present emergency situation, the government should not extend its helping hand which it must [as it is being done by governments the world over]. However, it needs to act with alacrity to remove wastage and inefficiencies in several areas and collect taxes from those who need to pay; those could add up to hundreds of thousand crore.

Sans concrete deliverables on these fronts, the Indian economy will remain fragile even after Covid – 19 crisis is over. Meanwhile, the people of India must cooperate with the government in its efforts to contain the pandemic and nip in the bud even the slightest chance of it assuming monstrous dimensions as is seen in China and several countries in Europe.

All that Modi is asking them to do is to ‘STAY AT HOME’ for 2 to 3 weeks. With little bit of restrain and self-discipline, they should be able to give it.

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