Indian Economy reeling under the spillover of COVID-19 — Finance Minister and RBI announcement of relief
After the spread of coronavirus , the government decided to lockdown the entire country. This has had a huge impact on the domestic businesses. As rules and regulations mandate the closing of businesses , they are facing an acute shortage of working capital. The government is also armed with the fact that businesses may have to lay off employees to reduce losses. As business are no longer able to operate , causal labourers in urban and rural areas would also lose their source of income.The consumer confidence in the economy also suffers a decline due to fear of wage cuts , unemployment etc. This would prevent lead to an unprecedented unemployment in the economy , thereby leading to inability to maintain an acceptable standard of living. The business confidence also suffers a decline and would lead a huge decrease in the investment spending.The government is also aware of the fact that this situation would lead to a decrease in aggregate demand , a loss of real GDP and a recessionary trend in the economy.This uncertainty revolving around business could lead to business failures. Various small and large secondary sector industries may start firing workers leading to a loss of jobs. In addition , government is also aware of the fact that many marginal and casual workers as well as small businessmen in rural and urban areas tend to have very less savings and “earn to spend”. This would also affect the incomes of the small and marginal farmers. In addition to income volatilities, sudden events could also delay their sale of produce that would deepen their debt trap.
During such crisis, these vulnerable groups of rural and urban areas need timely and appropriate support from the government to maintain an acceptable standard of living . The government intervention in India with the announcement of the finance minister would provide some relief to these groups .The provision of food under the package would ensure the country to maintain food security amongst the most vulnerable groups at the time of crisis. The provision of basic necessities ans merit goods would help to keep the distress of these people in check. The most interesting aspect of this package are the adequate steps taken to address the concerns of senior citizens and widows, who are neglected by the society and family at the time of distress. The higher unemployment allowances under MGNREGA would help to ensure that the vulnerable groups are not affected by short-term regional increases in the price of essential commodities. The direction by the central government to state government to use the welfare fund of construction workers to provide relief to them. This would help to provide income to daily-wage construction workers who would have been laid-off with the closures of construction sites and face an acute death of savings and basic necessities.The amendment of the Employees Provident Fund Regulations would prevent disruption from employment and who are at the risk of losing their jobs. Moreover, the insurance scheme for healthcare workers would encourage the workers who are exposing themselves to the deadly coronavirus and also provide them relief in case they are affected with the virus. This would unquestionably reduce the social and personal consequences during stressful situations. This would lead to a decrease in the psychological stress, prevent suicides and discourage people from committing crimes. The doubling of collateral-free loans for SHGs(Self Help Groups) would help 7 crore women.This might help prevent hoarding and ensure that people receive the necessities. This stimulus package had several positive externalities and would increasing the government spending in the economy , boosting consumer and business confidence , helping the business to come up after the crisis.
However , government mechanisms should operate with optimum efficiency to ensure that these provisions reach the people.The inefficiencies of PDS may affect this distribution of necessities. The access to cash transfers will be limited due to rules and regulations on transport and migration. However, it could serve to be immensely helpful to the people after the crisis.The other possible loophole in the system is that identification of beneficiaries is a difficult task and all intended beneficiaries may not be also to receive the benefits of this intervention. The government institutions should efficiently implement these measures and ensure the appropriate disbursal of the benefits.This would likely increase the final deficit of the government and might lead to a substantial increase in government borrowing. This could also lead to a decline in the expenditures on other promising avenues.
The announcement of the RBI would help to maintain financial stability and growth. In addition , the relief on the consumers after the announcement of moratorium period is a huge relief for consumers . In addition to decreasing bad debts , it would also offer some help to the consumers who have lost their jobs and are experiencing wage cuts. This recommendation of RBI should be accepted by the banks , and they should offer a deferment of EMIs.The credit card dues covered under moratorium , ensures consumers don’t have to pay the dues. This essentially helps to boost the confidence in the market. The deferment of working capital loans for business is a very important step to ensure that domestic businesses don’t face liquidity crisis and cash flow problems. This move is very beneficial for self-employed people who would be facing the threat of an uncertain income in the wake of country-wide lockdowns and promotion of social distancing. The decline in the repo rates would result in industries benefitting from cheaper borrowings and result in cheaper commodities , indirectly benefiting the consumers. However this decrease has a negative effect in fixed deposit holders ( senior citizens etc.) who depend on their interest . The cheaper interest rates would stimulate investments in the economy , giving a boost to the aggregate demand. This monetary policy might result in inflation in long-term. This would also prevent the share prices of some banks to further plunge, preventing rapid withdrawals.The government intends to support its macroeconomic policy , that would reduce the intensity of the recessionary trend that the country might face during and after the pandemic. This should also aim to ensure the flow of credit to the areas that are highly stresses due to shock of the pandemic on the economy of the country. The increase in the threshold of default from 1 lakh to 1 crore would prevent businesses from facing a liquidity crisis or insolvency.
The government also faces the challenge of stabilising the sectors like hospitality, aviation etc , which face cash flow problems to due to taxes and other statutory payments. Government should adopt proactive steps to prevent the collapse of these industries through tax waivers and subsidies. But this would have a negative impact on the final deficit due to increased spending but decreased revenue. The government faces the humongous task of setting priorities , creating efficient contingency plans and manipulating its spending to ensure the stability in the economy during and after the pandemic.