By Darshan Hiranandani
Yesterday was a day of bad news. COVID cases were poised to rise dramatically and just as dramatically, Indian GDP was predicted to fall. Goldman Sachs announced that Indian GDP will shrink to an all-time low of 1.6% of real-GDP growth in FY20-21. The country reflexively shuddered at this news and rightly so, this is a level not seen since pre-Emergency days. These are sobering times and many of India’s hard-won gains are at stake. India has made tremendous gains in poverty alleviation – lifting almost 270 million out of poverty in the last decade alone. But the ILO warns that these gains can be lost in a single year. Every economic pundit on primetime television is united in a single chorus: demand will shrink enormously. Make no mistake – this is not just a virus, this is now economic war too.
Expectedly, many companies in the private sector are operating on a war footing. Most enterprises are now running at zero revenues and zero production with high fixed costs. This is true across sectors – steel, cement, consumer goods. Even though some companies have permits to operate, they don’t have storage space of more than 4 days of production and with zero takers due to the lockdown they have had to shut down anyway. But through it all, most of corporate India is prepared to act in an ethical way by continuing to pay workers, setting up canteens in their factories to provide for the needs of the community and even repurposing entire factories to make masks and ventilators. However, none of this is sustainable unless the government announces a comprehensive stimulus package. And herein lies the Great Opportunity.
First, this global pandemic shows us the benefits of ‘Be Indian and Buy Indian’. As we isolate ourselves from the world, we have become critically aware of our own supply chain. We know now that relying on other countries for critical items – food, medicines, energy – ultimately puts you at their mercy. In the most dramatic example of this, the world saw the US President publicly entreating India to supply HCQ, a pivotal drug in the COVID war. To avoid scenarios like this for ourselves, it is more important than ever that we become self-reliant and reduce our dependence on the vagaries of other countries. And for this, the mindset of the affording Indian consumer must first change; we should prioritize domestic vacations instead of international destinations, buy more Indian brands and yes, even continue to support the local bhajjiwala who has been a critical pillar in this crisis.
There is also much that the government can do to bolster this effort. If we are to become more swadeshi – and we should – domestic production and domestic entrepreneurs must be given a real boost in the form of protection and tax incentives. Instead of being a global outlier in terms of heavy taxation, it is time that GST, corporate tax, and personal taxation on corporate dividends are brought down to reasonable rates. 25%-30% should be the maximum tax rate for Indian entrepreneurs and similarly, the personal tax regime should be capped at 30% with no further surcharges. These measures will not only make us truly competitive but will further add more people to the formal economy which in itself becomes a virtuous cycle of benefit.
Second, if we can make the best products for Indians, that same infrastructure and supply chain can be used to become the right pillar for exports too. Every country is looking to diversify their supply chain out of China. Japan recently spent $2.2B on getting Japanese countries to exit China. ‘Pack up and get out of there’ was the mandate by the Japanese government. All these companies are now looking for a new home for their supply chains! However, to be attractive at a much larger scale, India’s infrastructure and taxation system both need an overhaul. The time to reform the tax structure of the economy is now. The time for the Centre to print money is now, the time to borrow directly from the RBI is now, the time to make required structural changes so that fuel, gas and electricity get merged into GST is now. This will be an enormous boon to both the domestic and export-oriented industry, which are ultimately two sides of the same coin. There is no better time than now and if we can make India a domestic consumption powerhouse that makes for India, Indians can also export to the world.
But to arrive at this promised land, we must avoid some pitfalls on the way. Government and PSUs must honor their payments in a timely manner to ensure that they don’t slowdown the cash flow cycle in the economy. States must get paid their dues and their 14% increase. It was sad to see the state Government of Kerala having to come to the bond market and pay 9% interest for funds that it needs at this critical time. Similarly, it was also disheartening to see the central government cut the salaries of its own people last week (it started with its MPs). Asking employers to pay their workers, while the government asks its own workers to take a haircut will only serve to accelerate the demand contraction and distress (not to mention eroding the gains that we have made in paying our public servants reasonably in a drive against corruption).
Instead, it is the time to protect all salaries for all workers through any means necessary. The government must intervene and help enterprises conserve cash flow and provide them with liquidity. The US provided a 10% of GDP fiscal stimulus with their Federal Reserve provided a liquidity stimulus of another 10% of GDP. Naysayers will dismiss this as a ‘only in America’ move but remember that even Bangladesh has announced a scheme where the entire export-oriented industry can avail loans at 2% simple interest for two years to pay their salaries and wages bill to tide over these extraordinary times. In India, creating salaries and wages schemes will have the additional benefit of getting more people (both employers and employees) into the formal economy which will ultimately help the government systemically reduce tax rates for the future.
At some point, this COVID threat will pass and immediately after will be the time for the government to dust off its Rs 102 lac crore National Infrastructure Plan and start building with a bang. And there is so much to be done: the Central Vista, joining of the rivers, multiplying our roads and highways, completing the national gas grid and the digital grid. As we rise from the greatest threat of our times, it will be the time to build greater than ever before. This build-out has the ability to stimulate the economy quickly and expeditiously with stupendous long-term results.
History tells us that the greatest wins have always come from the greatest threats. And as India faces the greatest threat in her modern history, our country is uniquely poised to turn this into Great Opportunity that our children can thank us for. The time is now.
Apr 12, 2020
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