Navigating the Covid – 19

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 an unprecedented magnitude ,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.  US  has passed an act, called cares Act, focussed on addressing the crisis. IMF has created $ 50 bn aid facility with $ 10 bn for rapid disbursal and it will increase this corpus to $ 100 bn. IMF will use its full resources at $ 1 trn at its disposal to do whatever is required. World Bank also will harness $ 200 bn to address this crisis.

IMF has in its World Economic outlook, mentioned that 170 countries in the world will have a negative per capita GDP growth this year. The global economic growth will be negative 3% in the best case scenario, 6% lower than last year and negative 9 to 10% in the worst case scenario. Estimated decline in GDP in the worst case will be $ 9 trilion.

The projection for  India is a positive 1.9%  India, 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 shut down continues beyond May, this fiscal, India is likely to have a negative growth.  

At present , many industries have seen a fall in demand of more than 90%  and many others have seen demand less than 50% in the normal circumstances. Assuming that the crisis will be overcome within two months in India, Many sectors in India will witness a fall in revenue of more than 20% reduction in demand in the best case scenario and 35% reduction in demand in worst case scenario. Assuming that the government will come out with a big stimulus, we can consider a demand reduction of 10%.

In a normal circumstance, fall in demand in one country could be managed by meeting the demand in other countries through exports. But, in this situation there is a synchronised slow down in demand across the world. This is a very big challenge to increase exports. Further , there is an increased movement to manufacture locally by many countries in the world. The companies to cover their costs, will be forced to increase their price.

Realising the need for immediate response, Indian government also acted  very fast with immediate response to manage this pandemic. In the first round Rs.1.7 trillion was announced  and in the second tranche Rs.1 trillion was announced to improve the liquidity in the economy and alleviate the troubles faced by various segments of the society.

1. India has managed the crisis well and the world is surprised how we were able to navigate this crisis very well. India, Australia and Canada were taken as models for managing the crisis effectively. India’s pharma sector came to the rescure of supplying medicines to the world to alleviate this crisis.
   
   In an unprecedented crisis like this, the  Government has a major role to play in reviving the economy. The crisis management measures / stimulus measures,  can be considered in terms of ,1) where no investment is required ( relaxing regulations, Giving government 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 for a sector ) 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 to address this crisis and come out unscatched.
   
   In the new measures to be adopted by the government ,  the following options could be looked at .
   
   1) Apart from making investments in PSUs, they can create a new SPV ,which will 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. This strategy was followed by US in the last crisis.
   
   2) The SPV also could buy all the instruments which are rated BB and above from the market to create liquidity. Apart from instruments from Banks, NBFCs, instruments from Mutual funds, Insurance, Pension and Corporate could also be looked at. In the second stimulus announcement, few of the above issues were addressed.
   
   3) Government and Government employees are one of the major consuming class in the society. There are more than 3 crore under Central Government, Defence, PSUs, PSBs and Pensioners. 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.

4) Government, Government Departments and PSUs are large buyers of equipments, machineries’, IT and communication products. Due to budget constraints, government has moved away from outright of purchase of products to leasing and hire purchase of these products. The  Government departments instead of leasing the equipment s, machineries and services,  they could buy them outright in  large numbers.

5)       There is a perception that PSUs in India are not efficient compared to Private sector. In many sectors PSUs have better operating matrix compared to private sector. They also have large cash balances and good balance sheets. The strong PSUs can be requested to draw up large capex programmes to be implemented within India.

6) Due to budget constraints, the governments at both central and state level take lot of time to settle the 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.

7) Covid crisis brought out two major dimensions. Lives and livelihoods. There is a need to save lives of people but at the same time, the containment measures adopted should not result in loss of jobs, loss in income and loss of lives. The loss of lives due to containment measures could become more compared to loss of lives due to the disease itself. There is a need to protect the  employment and the  sectors which employ large number of employees , like transporation, travel, tourism, Auto, Real Estate and SMEs should be given a special focus and specific measures have to be announced to protect these sectors . For SMEs , an allocation of Rs.10,000 has been made to invest in equity capital of companies which have a scope to grow and get listed on the stock exchanges.

8.       Ease of investments. Sectors across the country faced many issues in keep their competitiveness in tact. There were many new regulations implemented at regular intervals, which has 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 to start a new business, take over a business and flexibility in the profile of  equity investors in a company.

9. 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 .

10. In the present scenario, to achieve positive economic growth this year, the governments at both centre and states have to spend more than what is spent in normal circumstances.  Central and state governments borrow Rs. 14 Lakh crore a year. This year could borrow an additional Rs. 14 L cr. Most of the required funds could be mobilised through money printing. This is called Modern Monetary theory. As above, Government can create a new SPV to raise corona bonds which will carry 4% interest. Government has to create a Sovereign crisis Management fund, where as part of this amount could be mobilised within India Main subscriber will be RBI followed by SBI, LIC and PSU banks. So far banks have parked 6.5 Lakh crores with RBI because no viable projects to invest. Government will 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.

All the major governments in the world have come with big  budget to address this issue. Apart from the local resources, they were also mobilising resources from Institutions like IMF, World Bank and ADB. These funds are available for long term at very concessional rates. The scope for availing these funds to address the stimulus could be considered. The major strategy could be to raise funds locally for all the stimulus measures , which will reduce the foreign currency risk. For borrowings from abroad, part of the dollar reserves could be utilised.

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.

R. Kannan

Hinduja Group

( Views of his own)