13 April 2020
Three-pronged 10-step urgent toolkit for Indian economy
To ensure effective lockdown and strong revival post COVID-19 pandemic
Before Mar’20 or pre-COVID19, we were among the few market economists who were strongly against any sort of
stimulus, be it fiscal or monetary. Declining domestic savings was one of the reasons for our view. Nevertheless, with
almost negligible discretionary spending, household financial savings should rise as % of GDP/income, making this
concern secondary right now.
In this note, we suggest a three-pronged 10-step actionable approach to be implemented at the earliest so that (a) the
lockdown is extremely effective, and (b) various economic participants get confidence that post-COVID19, recovery
would be strong. Overall, this would mean an additional government spending of INR4t (or ~2% of GDP), which we
expect would be financed by the RBI.
#1: For the most vulnerable working sections – In order to ensure effective lockdown and strong fight against COVID-19,
the government must take care of the casual/migrant workers and the health professionals/police officials by
announcing: (1) Cash transfer of INR200 per day per casual/migrant worker for all unpaid leaves between Apr-Jun’20,
along with an ex-gratia payment of INR1lac for all health/police officials for putting their life and health at risk, (2) An
insurance cover of INR1m for all casual/migrant worker and an INR5m for all on-duty police officers in the country, and
(3) Door-to-door supply of free food (and three cooked meals a day with sufficient provision of drinking water in migrant
worker camps). All this could cost the government INR2.2-2.4t (1.1-1.2% of GDP) in FY21.
#2: Prevent mass bankruptcies/lay-offs by MSMEs/hard-affected sectors: Further, the government needs to ensure the
prevention of widespread bankruptcy among MSMEs (including self-employed enterprises) by announcing: (4) The
relaxation of rent payables (for say, 1QFY21) and electricity charges for all MSMEs, (5) Interest-free uncollateralized 12-
month loans for a maximum of salary/wages worth three months, and (6) A special bail-out package should also be
provided for the most-affected industries such as Aviation, Tourism, Hotels and Restaurants and Exporters/Importers.
However, all such support should be conditional on retaining the number of employees and their salaries/wages at the
level as on 1 Mar’20. These steps could cost the exchequer another INR1t (~0.5% of GDP).
#3: To ensure stable financing: Finally, although the RBI has already announced a number of steps, it is time that it
supplements them with: (7) Outright purchases of government – central and states securities – equaling the COVID19-
related spending (INR5-6t or 2.5-3% of GDP), (8) Complete scrapping of the reverse repo window to force banks to either
lend or invest in government/corporate securities, (9) An interest-free conditional uncollateralized 6-month loans to all
affected parties – retail or corporate (non-MSMEs), and (10) Re-thinking the absence of moratorium for all repayments of
the non-banking financial companies (NBFCs).
To conclude, we do not expect Indian authorities to announce an economic stimulus worth 5% or 10% of GDP. However,
our three-pronged 10-step targeted approach will help save human lives and also maintain their livelihood.
In this note, we discuss a
approach that Indian
authorities must ideally
adopt at the earliest.
As our readers know, we are one of the few market economists who have strictly
against massive monetary easing
(in the form of interest rate cuts or outright
quantitative easing), whether to support the country’s fragile financial sector or to
boost lending growth in the economy. Further, we have always believed that there
negligible space for fiscal stimulus
in the country. The major reason was the
rapid decline in domestic savings, which gets adversely hurt by any stimulus.
Not anymore though! The advent of COVID-19 has changed the fundamentals
dramatically and so have our views. In this note, we discuss a three-pronged 10-step
approach that we believe the Indian authorities – the government and the RBI –
must adopt at the earliest to ensure (a) an effective lockdown, and (b) economic
participants become confident that recovery would be strong post COVID-19.
Nikhil Gupta – Research Analyst
(Nikhil.Gupta@MotilalOswal.com); +91 22 6129 1555
– Research Analyst
(Yaswi.Agarwal@motilaloswal.com); +91 22 7193 4196
Investors are advised to refer through important disclosures made at the last page of the Research Report.
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