COVID-19: Economic Implications for India and The World.

(1)  This is an economic challenge of proportions not seen since the Great Depression. The 2008 crisis was largely a US and EU focused crisis caused by a build-up of balance-sheets in the western world. India had a strong balance-sheet and had head-room to create a fiscal stimulus. The current recession is far larger, reflected by the precipitous fall in Markets. In 2008-2009 the market corrected 60% in 14 months between Jan 2008 to March 2009 from 20827 to 8325.   The Sensex has already corrected 33% in less than 1 month. 

(2)  Unorganized industries, transport, hotels, tourism and urban masses will be considerably hit. Resulting in increased delinquencies and job losses. Job Losses will result in considerable increase in defaults in home loans, personal loans and credit card debt.

(3)  This could result in a spiral or a ripple effect that can create further unemployment and may require massive bank bail-outs.

(4)  Treating this as a normal recession is like taking a knife to a gun fight.

There are a few positives:

(1)  Corona Virus has lower R0 in higher temperatures, hence we may not have the same viral outbreak experienced by China, EU and USA (link).  If we can control this to less than 10,000 cases in India at the peak, we should be able to benefit enormously.

(2)  Lower Oil price keeps India in good shape for the recovery as it creates trade surplus.

(3)  The world would like to diversify its Manufacturing base and India could be a good alternative for china in the medium term.

(4)  India is a domestic focused economy and hence could see an early recovery.

I propose the following key measures:

Recommendation based on sectoral Impact analysis:

Main purpose of these recommendation is to ensure direct benefit at the grass-root level and effective transmission of policy measures to revive & rejuvenate the economy.

(A) General:

(a)   Public Welfare & Employment:

I.         LTA @ 200% for Financial Year 2021-22 to promote tourism. Given that outcome of Virus spread this year may be difficult to predict.

II.         Bonus/Ex-gratia/Overtime received by essential services workers to be completely exempt under Section 10

III.         Free Distribution of 3 month ration (Rice, Dal, Sugar & Kerosene) through PDS to the Orange card holders/daily wage earners. This can be implemented through digital mobile couponing system to avoid long queues.

IV.         Setup of Pradhan Mantri Pandemic Fund with 100% 80G deduction to be used for various social welfare schemes at regional, local and gram Panchayat level.

V.         50% GST waiver on essential commodities for a year. Alternatively, only CGST can be waived off so that states can have revenue for providing PDS support.

VI.         Given that work from home is encouraged, Chapter VI deduction for water, electricity, mobile and internet bills for 3 months for everyone and waiver for people with annual family income below 5 lakhs.

VII.         50% salary of the new employees hired after 31-March-2020 can be considered towards CSR requirement (in case of profit) or a new Chapter VI deduction can be given provided the net increase in employee numbers and will be accrued over the period of 2 years.

VIII.         Quarantine and cleaning expenses incurred by corporates can be used against CSR requirement (in case of profit) or via a new Chapter VI deduction by providing proper documentation.

(B) Critical Sectors

(a)   Banking:

I.         6 months moratorium for principal and Interest payment for Agriculture & Homeloans, personal loans and SME/MSMSE loans.

II.         Delay in loan payment should NOT affect credit scores for the next 1 year.

III.         RBI to appeal to BIS to change norms for IRAC on defaulting loans to 180 days for the CY 2020 to CY2022 and consequently ease prudential norms

IV.         Relaxation in SMA classification.

V.         Government backed Credit Guarantee worth 50,000 crores for SME/MSME. Micro-loans given by FinTech startups should also be considered for guarantee/interest waiver/moratorium.

VI.         LRD defaults are more likely for commercial properties unless there is rent waiver and resulting LRD restructuring for 3 months.

VII.         Reduction in reserve ratio: CRR @ 2% and SLR @ 15%

VIII.        Bills discounted/Export financing should be given additional credit period of 90 days for settlement and NPA classification.

(b)  Startups / SMES/ MSMES

I.         Venture Capital Funds should receive long term capital gain deduction up to 200% of capital invested over next 2 years

II.         Additional 10,000 crores of fund of funds allocation for SIDBI to ensure immediate funding of early stage start-ups to create maximum employment.

III.         PSL status for loans given to startups during 2020-22

IV.         50% RWA for SME/MSME loans for next 1 year

V.         Regulatory filing deadline to be extended.

VI.         Down round upto 50% should not attract adverse taxation provisions and scrutiny

(c)   Logistics:

I.         Toll wavier for 6 months

II.        10 Rs per liter Diesel/CNG subsidies for next 3 months

III.       50% Excise Duty reduction on essential items for next 6 months

(d)  Agriculture:

 I.        Warehousing and cold storage fee waivers for 6 months

II.         Mandi fee waiver for next 6 months

III.         Farmers having up to 5 acres land should be given free electricity and water for next 6 months.

IV.         Commodity Backed hedged agricultural bonds to augment capital for this cause.

(e)   Travel driven Industries: Aviation, Hospitality, Travel & Tourism & Event Management

I.         Airline Industry has been hit the most. Given the medium to long term impact, the best course of action can be to provide relief package of 5,000 Crs for existing loans/commitments and providing loan @ repo rate secured against 40% of future revenue.

II.         20% discount on utility bills for 6mn for travel agencies, hotel, airlines & malls

III.        Waiver of luxury tax on Hotels and Restaurants for the period of 18 months.

IV.         GST exemption on ticket sells and sponsorship amount for event management companies.

(f)   Insurance & Medical:

I.         Like aviation, for ailing insurance companies, 2000 Crs worth of relief package secured again 40% of future revenue receipts can be provided

II.         For current and next assessment year, Chapter VI deduction for Mediclaim and Insurance to be doubled.

III.         2000 Crs package for medical equipments, materials and tests.

(g)  Construction & Real Estate

I.         Stamp duty waiver and 50% GST reduction for next one-year period.

II.         Additional waiver for Home loan principal & interest under Income Tax for retail customers.

III.         Downward revision of Ready Reckoner Rates for properties since there will be a massive fall in home values.

Conclusion: Approximate size of total package based on above recommendations will come to around 2,50,000Crs (~30bn USD) which will be approximately 1% of the GDP