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Editorial Analysis: Spend money to save the poor

Coronavirus hurting growth

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Coronavirus hurting growth

Coronavirus hurting growth:

  • It is clear now that the economy is going into a prolonged downswing, and chances of a 5% growth in FY21 are slim.
  • Unless the government steps in with some stimulus, even a 4.6-4.7% GDP growth looks like a tall task.
  • While there is a demand for a rate cut, that could prove less useful at this point because corporate credit risk is set to deteriorate sharply, and banks should be very cautious.

Fiscal stimulus needed:

  • A fiscal stimulus of at least Rs 1-1.5 lakh crore is needed even if tax collections come in well below targets (collections could fall short by 30-35%).
  • We need to keep the economy going, and this isn’t the time to worry about high fiscal deficits.
  • The Rs 45,000 crore that the government is expected to earn from the higher levies on auto fuels will come in handy.

Boost small businesses:

  • The funds should be channeled into smaller businesses, which could be given a line of credit and allowed a moratorium for tax payments, maybe even loan re-payments.

Govt spend on infra projects:

  • The government should spend on projects—construction of infrastructure, roads—to ensure daily wage earners are able to make a living, and small farmers, too, could be helped.
  • Those most vulnerable to losing their incomes are workers in the informal or unorganized economy—waiters, truck and taxi drivers, salespersons, shop assistants, etc.

Labour Reforms:

  • This is a good time to roll out labour reforms.
  • By protecting labour, the government has only frightened the corporate sector from hiring; easier hire-and-fire rules would encourage them to take on more people.

Rate cut not enough to boost growth:

  • Meanwhile, RBI could consider some forbearance on asset classification for MSMEs.
  • A 50 basis point rate cut by RBI, even if it happens, can at best, spur lending at the margin.
  • This is because lenders are already cautious, and borrowers are also not highly interested.
  • The collapse in demand—for goods and services—exacerbated by the epidemic, will see production being scaled down.
  • Given the uncertainty surrounding businesses, jobs, incomes, and even wealth, few individuals would want to leverage themselves at this point.
  • From a lender’s point of view, however, it is critical to use capital carefully.

Capitalization of banks needed for capital growth:

  • Even before talking of growth capital, it looks like banks are going to need a lot more capital for provisions.
  • There is likely to be a sharp increase in defaults, and NPAs are now certain to rise for a host of sectors like construction, real estate, telecom, tourism, transport, and hundreds of companies are likely to be downgraded.

Also Read: How far are we from COVID-19 drugs, vaccine?

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