Financial stability is a public good, and so government has a vital role in maintaining price stability and welfare growth
More than the global financial crisis of 2008, Covid has disrupted the entire world in general and the Indian economy in particular. According to Pew research, the pandemic has added 75 million people to the below poverty line category. As per the Dun & Bradstreet report, about 82% of micro, small and medium enterprises (MSMEs) in India experienced negative impact during the last one year due to Covid and the consequent prolonged lockdown which disrupted their operations and dented their balance sheets. So elimination of poverty in India by 2030, as per the Sustainable Development Goals, will be a formidable task.
On the other hand, the government’s financial position is dwindling, and public debt is expected to reach 100% of the gross domestic product in 2022. In view of these challenges, it is important to ensure financial stability to address various pressure points in the Indian economy.
It is well recognised that financial stability is well intertwined with the health of the real sector. As such, preservation of financial stability ensures not just price stability through monetary policy but also fiscal sustainability and external sector’s viability in an economy. More specifically, the overarching objective of financial stability is to maintain the sound financial health of domestic households, MSMEs/corporates, banks, and the government at large during this black swan event.
While there was euphoria at the beginning of 2021 due to the gradual slowdown of Covid cases in the first wave, and the consequent emergence of green shoots in the economy, the second wave dashed the hopes of a nascent recovery. Rating agencies revised their outlook. Against this backdrop, how do we ensure financial stability amidst the crisis of this century?
As Covid positivity rate and mortality rate are worrisome in India, the government may announce special incentives to the best performing private hospitals in controlling the contagion. Also, the urban poor households need policy support through creation of jobs as the unemployment rate has reached its peak level in India (7.11%) during the Covid crisis (ILOStat database). While the government may issue job cards to reverse migrants, the number of days of employment for the rural poor households may be increased from 100 to 150 days as per the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA).
Rural youth may be skilled through ‘Do-It-Yourself’ videos in sustainable livelihoods like beekeeping, phenol making and boutique. Based on the deprivation index, priority may be accorded in the allotment of houses to the Covid affected households under the Prime Minister Awas Yojna – Gramin scheme.
As MSMEs are the weakest link in the entire corporate value chain, the government may declare a minimum moratorium period of two years on their loans to save lives and livelihoods. Further, MSMEs may be provided special cash incentives/ease of access to finance if they are registered with the Goods and Services Tax Network (GSTN).
Production Linked Incentive scheme should be made entrepreneur-friendly to create a conducive manufacturing ecosystem, thereby making MSMEs partners in global supply/value chains. ‘Rural Haats’ may be promoted in a big way to connect small and marginal farmers and SHG women to the markets, thereby enhancing their incomes. The government also needs to intensify its efforts to cover all street vendors (who repaid their first loans under the PM SVANidhi scheme) and enhance collateral-free and interest-free working capital loans to tide over the crisis.
The mounting non-performing assets (NPAs) may result in lower than estimated dividend income for the government and higher than estimated recapitalisation of banks. Hence, the Reserve Bank of India needs to focus on capital adequacy (recapitalisation of banks through unequal voting rights), asset quality (keeping income recognition and asset classification norms standstill for 2021-22 too and revision of 90-day NPA norm to 180 days), and profitability of banks and financial institutions (strengthening of corporate governance norms to reduce frauds) to ensure credit flow and build resilience in the financial system.
Besides, banks/financial institutions have to embrace artificial intelligence, machine learning and blockchain technologies to instil robust risk culture and compliance systems to sail through the crisis.
The government needs to follow austerity measures to reduce its revenue expenditure (minimum government and maximum governance model) and increase productive investments, particularly in healthcare, education and infrastructure sectors, to revive the limping economy.
The government may advise insurance companies/banks, both public and private, to utilise the amount lying in unclaimed policies/unclaimed deposits to support the pandemic victims. The government may appeal to the public to contribute voluntarily/opting for ‘giving pledge’. Further, the government may extend special tax benefits to employees and non-resident Indians on their voluntary contributions and avoid overcrowding in the debt market (including foreign debt).
As the second wave has been wreaking havoc, the government’s fiscal position is facing two major issues: lower tax collections and higher fiscal stimulus. Given its limitations in the fiscal space, the government may push for allocation of corporate social responsibility funds (Rs 10,000 crore is available with listed companies alone) for healthcare. As the Nifty generated 68.59% returns (on 52 weekly basis) as of March 2021, the government may enhance capital gains tax as part of its progressive taxation on the super rich/high net worth individuals.
The US government announced a massive fiscal stimulus package of about $6 trillion to save lives and livelihoods during the last one year. It is said that welfarism leads to significant multiplier effects and factor productivity in the long run. Financial stability is a public good, and so the government has a vital role to play to uphold price stability, economic revival and growth in its welfare discourse.
(M Srikanth is Associate Professor and Director [Finance], DDU-GKY, National Institute of Rural Development and Panchayati Raj, Hyderabad. R Mohana Prabu is Assistant General Manager, International Banking, State Bank of India, Chennai. Views are personal)
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