How to kick-start the economy post COVID-19?

The current economic scenario in the country can be summed up as under:

  • Corporates have piled up stocks and will not increase production and rather would reduce it
  • MSMEs face liquidity issues and mounting dues
  • Job losses are increasing. CMIE Data says unemployment rose to 27.11% on 3rd May, 2020.
  • Farmers face challenges in shifting the produce to market yards.

Solution?

In order to address the problems of the economy, GDP growth has to be increased.

How?

By increasing the demand.

How?

By increasing the employment

Is it possible?

Increasing the employment is difficult, since corporates, MSMEs and agriculture, all are facing problems.

Solution?

Printing money doesn’t solve the problem. We need to create jobs and pay that money. Then, it will lead to increase in the purchasing power of the people and in turn increase in the demand and also supply of the goods in due course.

Therefore, expecting the private sector to kick start the economy in the above mentioned scenario is like hoping a limping man will take part in Olympics running race and get a gold medal! Hence, it is inevitable for the government to take the first initiative to kick start the economy. The author proposes the following steps in a sequential manner to address this issue.

Step 1: kick start the stalled and delayed central projects

As many as 401 central government sponsored infrastructure projects (out of total 1701 projects), each worth Rs 150 crore or more, have been hit by cost overruns of over Rs 4.06 lakh crore owing to delays and other reasons, according to the Ministry of Statistics and Programme Implementation that monitors these projects and submits the status report to the parliament on quarterly basis.

“Total original cost of implementation of the 1701 projects was Rs 20,65,739.00 crore and their anticipated completion cost is likely to be Rs 24,71,954.78 crore, which reflects overall cost overruns of Rs 4,06,215.78 crore (19.66 per cent of original cost),” the ministry’s latest report for December 2019 said.

The expenditure incurred on these projects till December 2019 was Rs 10,89,178.11 crore, which is 44.06 per cent of the anticipated cost of the projects. The average time overrun in 583 delayed projects (out of the total of 1701 projects) is 39.40 months. The major reasons for time overruns, as reported by various project implementing agencies, are delays in land acquisition, forest clearance and supply of equipment. These central government sponsored infrastructure projects are in the sectors- Power, Irrigation, Roads, Railways etc.,

Strategy suggested

The government should identify the key projects and those that are on the verge of completion in this stalled and delayed projects and infuse the required funds on top priority. This will immediately generate jobs to construction workers, particularly the contract labour, daily wages workers and migrant workers.

In turn, this will lead to more demand for steel, cement and other construction materials resulting in these industries to produce more. Resultant will lead to more jobs and more production in these industries. Hence, positive multiplier effect in other sectors like housing, infra, truck manufacturing, construction machinery manufacturing etc. will be observed.

Avoiding this huge time and cost over runs in central government sponsored infrastructure projects will lead to at least 1% growth in GDP.

Step 2: Government should activate the PDS and stop leakages, delay in distribution of farming produce and ensure farmers get direct access to markets and have remunerative prices.

Studies indicate poor infrastructure like bad roads and shortage of godowns and cold storage centres is resulting in around 10 percent additional transport and storage costs to the Bharatiya farmers. Food loss in Bharat is estimated at ₹ 920 billion per annum (harvest and postharvest losses).

Globally the food loss is estimated at 24% during production, 24% during handling and storage and 35% at consumption. Therefore, strengthening the rural infrastructure can save the annual food loss of ₹ 920 billion in Bharat.

It is a fact that the MSP (Minimum Support Price) mechanism of the government has neither completely benefited the farmers nor the final consumers. Middlemen continue to make money though the farmers are compelled to do distress sale sometimes due to surplus crops whereas the final price of the food products to the consumers continue to remain at a high level.

The government should disband the MSP mechanism and allow free market access to the farmer to get remunerative prices for his produce. This can become a reality only when there is a strong supply chain consisting of storage, transportation, distribution and wider market access as a viable alternative to come out of the clutches of the middlemen.

The existing network and infrastructure of both central government and the states under PDS (Public Distribution System) to be transferred to a SPV (Special Purpose Vehicle i.e., special purpose entity) and this SPV should take up the task of providing open market access to the farmer across the country. This SPV may retain a portion of the market price realized by selling the farm produce towards the cost of services provided under the SPV and share the balance revenues with the farmer.

In due course, the SPV can build a corpus that will not only take care of the maintenance of its assets but also development and expansion of the same to strengthen its overall supply chain. This mechanism will not only enable the government to save on its annual PDS expenditure but more importantly provide wider market access at remunerative prices to the farmer and eliminate the exploitation by the middlemen.

From the substantial annual savings on PDS expenditure by adopting the above mentioned SPV mechanism the government can instead provide a comprehensive rural insurance cover to the farmer (i.e., the small, marginal and medium farmers) to protect them against the risks of crop failure, farm debt defaults and market price fluctuations, in addition to providing a reasonable insurance cover towards life and health of the farmer and his family.

Greater attention needs to be paid towards the small, landless farmers who either work as labourers or till the land on lease basis to ensure that these people are duly covered under the comprehensive rural insurance.

An integrated approach can be adopted in order to avoid overlapping of resources and duplication of expenditure by the Ministry of Agriculture and Farmers’ welfare and the Ministry of Health and Family Welfare at the central government. A similar integrated approach may be adopted by the states as well. Avoiding the leakages in PDS as mentioned above will result in a minimum of 1% growth in GDP according to various estimates.

The step 1 and step 2 mentioned above if immediately started in right earnest in 6 months’ time significant results can be seen.

Step 3: Dues to MSMEs (mainly by the government) to be cleared and banks to give additional working capital loans treating the existing working capital loans as deferred payment loans to be repaid over a period of time.

Under Section 16 of the MSMED Act, delayed payment to micro and small enterprises (MSEs) for the supply of goods and services by them beyond 45 days attracts compound interest with monthly interests at three times of the bank rate notified by the Reserve Bank.

However, in reality the MSEs continue to experience inordinate delays in receiving the payment from suppliers including the government entities. As a solution to this problem Banks and FIs should be encouraged to expand the post-sale finance portfolio to MSMEs without recourse to the MSMEs. This will shift the onus of repayment of the bank dues to the debtors of MSMEs. Also the government enterprises that owe a large sum of money to the MSMEs which is estimated to be more than Rs.5 lakh crores to be cleared at the earliest so that the much needed liquidity comes into the system to revive the activities.

Government of India and RBI to frame policy guidelines to enable the banks, NBFCs and FIs to convert the existing working capital credit facilities given to MSMEs into Working Capital Demand Loan (WCDL) that is repayable within a tenor of 3 years.

Government of India and RBI to frame policy guidelines to enable the banks, NBFCs and FIs to give additional working capital credit facilities to MSMEs equivalent to their extant eligibility (i.e., before COVID19) and the recently announced Rs. 3 lakh crore collateral free loan facility may be linked with this.

When the measures suggested in step 1 and step 2 are implemented in a time bound manner the process mentioned in step 3 will ensure that the MSMEs are ready to take off by the time the economic revival takes place consequence to the measures mentioned in step 1 and step 2.

Step 4: The government should have dialogue with the industry and arrive at an amicable settlement to pay the wages to all categories of workers (i.e., regular, contract, daily wages) in factories for the total lock down period.

Governments (both centre and states) should take a major load in the above otherwise majority of the MSMEs can’t pay the salaries for the lock down period as they are in bad shape. The governments should have a dialogue with the industry representatives and federations to evolve an action plan to provide income insurance cover to this working population (by paying a small portion of the salaries and wages as monthly premium to insurance companies who in turn will provide the income insurance cover) so that in lock down conditions like this these people get their wages/salary protection as a long term solution to this problem.

Step 5: Immediately bring a long term investment policy in healthcare sector to attract capital investment under PPP mode for the manufacturing of medical equipments, kits, creation of hospital and other infrastructure.

This will enhance the medical preparedness of our country to handle any health emergency situation in future. This requires cooperation of the states since healthcare is currently a state subject under the constitution.

In 3 months’ time frame the suggestions mentioned in step 4 and step 5 can be fully rolled out by forming separate task forces comprising all major stake holders as members.

Crisis is always an opportunity to find a solution to a problem and therefore this COVID-19 is to be converted into a golden opportunity to address the issues thrown open during the lock down phase so that the nation can march ahead.


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About the Author

Dr. B.N.V. Parthasarathi
Ex- Senior Banker, Financial and Management Consultant and Visiting faculty at premier B Schools and Universities. Areas of Specialization & Teaching interests - Banking, Finance, Entrepreneurship, Economics, Global Business & Behavioural Sciences. Qualification- M.Com., M.B.A., A.I.I.B.F., PhD. Experience- 25 years of banking and 14 years of teaching, research and consulting. 100 plus national and international publications on various topics like- banking, global trade, economy, public finance, public policy and spirituality. One book in English “In Search of Eternal Truth”, two books in Telugu and 20 short stories and 27 articles published in Telugu. Email id: [email protected]