“GOVT SHOULD TARGET JOB-INTENSIVE AND STRESSED SECTORS...”

...such as construction and real estate and sectors that are most stressed like airlines, power, shipping and transport D. Subbarao, Former RBI Governor

How do we restart the economy? I gather about two- thirds of the manufacturing sector has closed during the lockdown. This will have to be restarted consistent with the phased lifting of the lockdown. Restarting has to happen not by sectors but by supply chains. Both large and small firms will

need cash to restart. One way to do that is for the government and PSUs to pay all dues they owe to private corporates. The targeted LTRO ( longterm repo operations) of RBI (whereby banks get access to long term money from the RBI for buying corporate bonds) is another way to put cash in hands of corporates.

What should be the first steps post the lockdown?

The lockdown would have hit both supply and demand. The measures mentioned earlier address the supply side. There has to be stimulus on the demand side so that supply and demand normalise in tandem. One way is to expand payments under PM’s Kisan Yojana, and expand MNREGA.

Should India give sector- specific stimulus (government seems averse to this) or across the board as it has been doing?

The government’s resources are limited. To get maximum bang for the buck, the government should target sectors that are job intensive like construction and real estate and sectors that are most stressed like airlines, power, shipping and transport. If done transparently, the political backlash of such a targeted approach can be minimised.

Does the government have the resources for these big expenditure commitments?

That is a huge challenge. Our fiscal (condition) was already overstretched.

Add to that just the loss of revenue because of the shutdown and the combined fiscal deficit of the Centre and states will exceed 10 per cent of GDP. The expenditures we talked about will be on top of this. There is a view that the government must spend whatever is necessary to fight the pandemic regardless of the adverse economic impact. As much as I am sensitive to minimising the human cost of the pandemic, we must recognise that millions of people in the informal sector will be forced to the margins of subsistence in an extended lockdown. There is an equally compelling humanitarian dimension on both sides. Besides, a blue sky approach to spending will take a heavy toll down the road by way of inflation and exchange rate volatility. In the interest of efficiency and transparency, the government must pre- set a fiscal target, maybe 2 per cent or 3 per cent of GDP, and work within that. The target can be revised later if necessary.

How do we save SMEs?

SMEs operate on very thin margins. They are the worst hit. Mandate large corporates to pay up their dues to SMEs from what they receive from the government. Another option is a dedicated line of credit from the RBI to banks to lend to SMEs. Since banks might be wary of the

credit risk, the government will have to guarantee these loans. A similar government guarantee scheme should be channelled through MUDRA to support small unorganised enterprises.

Loan restructuring will be necessary in many cases. Banks may be diffident about restructuring even cases that can get back on their feet. To neutralise that, the government may have to come up with a TARP-like programme to give capital support to firms. ( The Troubled Asset Relief Program was created and run by the US Treasury in the wake of the 2008 global financial crisis.) This programme can also be used for large firms, especially in key sectors like travel, hospitality and logistics, to enable them to raise domestic and foreign equity.

How is the coronavirus financial crisis (CFC) different from the global financial crisis (GFC) of 2008- 09?

First, the GFC originated in the financial sector and then the contagion transmitted to the real economy. In the CFC, the causation is in the opposite direction. The second difference is that the level of uncertainty is much deeper in CFC because of the number of known unknowns about the coronavirus. Third is in available solutions. In the GFC, solutions to the real economy and in the financial sector worked in tandem. In the CFC, there is a trade- off – the stronger the measures to contain the pandemic, the bigger is the hit to the economy.