By Sudhakar Panda in Bhubaneswar, July 6, 2020: The Covid-19 pandemic has impacted the entire world economy. But the deadly virus hit India at a time when Indian economy faced manifold crises.

For one thing, the Indian economy was making sustained efforts to regenerate growth and reverse the trend of slow growth that lowered India’s growth rate to 3% and continues affect it.

It is true that there was a slump in world economic growth. In fact the global economy is in a depressed state to-day. The Economic Outlook in October last year observed “The pace of global economic activity remains weak. Momentum in manufacturing activity, in particular, has weakened substantially, to levels not seen since the global financial crisis”.

It is estimated that COVID-19 pandemic would have a negative impact on world economic activities in the first half of 2020 than anticipated. World Economic Outlook April, 2020 expresses a fear that global economy may even contract sharply by minus three per cent in 2020. The slow pace of global economic development will have its adverse impact on the development of the Indian economy.

Indian economy is also impacted by USA-China trade war. On September 1, 2019 additional tariffs of 15% was imposed by America on more than $125 billion imports from China. This raised the rate of import duty on imports from China on average to 21.2%. This stands in sharp contrast to just 3.1% of import duty on US imports when Donald Trump assumed US administration.

China retaliated the Trump gesture by imposing additional taxes on 1,717 numbers of US exports. The problem of US-China trade war has adversely been impacting the global economy. Such trade conflicts prove costly for China and the whole global economy.

The government while planning for growth has to take care of the poor targeted segments of the population by transferring cash to put purchasing power in their hands. The state is also expected to address the problem working capital needs, particularly of the small and medium enterprises to facilitate their working. Economic stimulus is necessary to support the vulnerable segments of the society and to prevent additional structural damage to the economy amid the lockdown which suddenly stopped the business activity in India.

The painful effects of the Pandemic are visible in almost all the sectors of the Indian economy. Industries have either been closed or kept open partially under utilising their production capacity. The Railways, the Road Transport, Civil Aviation, Tourism, Exports and Imports, Entertainment Industry, Shipping, Chemical Industries, Textiles, Financial Services Sector and the Hospitality Sectors stopped functioning or functioning partially. Even the Retail Sector and Small and Petty Businesses have been badly affected and are in distress. Of late Construction, Infrastructure works, Automobile Sales, E-Commerce, Digital entertainment have started in a modest way.

All these threats – slow growth in the world economy, global trade conflicts, (rising real interest rates,) volatile commodity markets, slump in global commercial services, gloomy sentiment in the stock markets across the world, volatility in the financial markets and uncertainties surrounding the oil market are likely to continue in the near future. These developments are likely to unfavourably impact the economic situation in India if the global situation does not improve.

What is more worrisome at this time that if the major economies like the USA, China and UK think of protectionist policies to safeguard their economies, world will face severe economic consequences in the coming years. India will be one of the economies that will also suffer from USA’s rising protectionism as well as rising interest rates in developed countries. India’s exports have been going down and may further suffer a decline if these conditions continue or worsen. Given the gloomy outlook, what are the policy prescriptions for the revival of its economy?

The effects of the Pandemic are visible. It is estimated to push 120 million Indian into poverty and 135 million into unemployment as per a study by an International Consulting firm Arthur D Little. This is an indication of the magnitude of the problems we face. The reliefs provided to the different sectors of the economy by our Finance Minister have not succeeded in reversing the slowdown of the economy.
In view of the Covid-19 crisis both the Centre and the states have been incurring expenditures which were unanticipated before and this may keep on mounting due to a splurge in the number of Covid-19 patients.

How do we respond to the economic slowdown in India that has been inflicted on us by Covid-19 resulting in weakening our growth? How do we put the economy on the growth path when due to lockdown (i) unemployment which has gone up, (ii) consumption has declined (iii) business transactions have declined and (iv) trade and business continue to suffer from loss as never before? How do we plan to achieve a higher rate of growth in our GDP particularly at a time when we face rising fears of global economic stagnation? What measures should be taken by the country to maintain and increase the level of our international trade in view of USA-China trade war? How do we move to accelerate growth with the political and regulatory framework in vogue in India?

This issue of reviving India’s growth has become all the more pressing in view of the IMF forecast (on June 24) of a sharp contraction of 4.5% for the Indian economy in 2020, which has been termed as a “historic low,” due to the undeterred spread of Covid-19. Given the assessment of the IMF, it is needless to overstate the importance of development of the Indian economy. What should be our economic policies and fiscal approach in particular to encourage trade, commerce, business and private investments to accelerate growth in the economy?

It is time to think and rethink on issues that have emerged. It is in this context that we propose to discuss the broad contours of fiscal policy that India should pursue to get out of this dismal state of affairs.
To do the planning for revival of the economy we have to look at the different dimensions of the Indian economy. Let us have a look at the Indian tax landscape.

Fiscal Policy refers to the tax and expenditure policies of the Union Government that is the Government of India. Fiscal policy decisions are determined by the Union Government. In fiscal policy we study the means or the instruments or the avenues available to the state to generate revenue to not only carry on with the economic activities of the state but also to promote economic development with stability. On the other hand it is studied to know about revenue generation, mobilisation of resources and expenditures incurred by the state to attain the objectives set in Government’s economic policies.

Taxation is a powerful instrument of fiscal policy in the hands of public authorities to try to create the desired impact on consumption and investment. In regard to taxation policy we have three options; (i) we maintain the status quo. No change would be affected in the tax rates, whether it is Income Tax or Corporate Tax or GST. The other two options available to us are to (ii) increase tax rates or (iii) decrease the tax rates.

Can we increase the tax rate now particularly at a time when the economy is slowing down and the economy experiences low and lower growth rates? Can we increase tax rates on the super-rich? Or for that matter can we think of imposing a surcharge on transactions above a particular amount? It is a difficult question now to answer. “The additional surcharge may drive entrepreneurs and other high net worth individuals out of India,” said Prakash Hegde, a Bengaluru-based chartered accountant. He maintains that “Considering the low incremental revenue the government is estimating from the surcharge, the effect on business confidence is hard to justify.”

The other tax option open to us; should we impose a higher tax on the salaried class the most honest tax payers among the tax payers? Not only will this hurt them the scope for that is very limited now. Many of the employees in the organised private sector may not be getting full pay. Some of the companies particularly the private airlines have not been paying any salary to their employees as their business has come down or stopped because of Covid-19.

So increasing the tax rates is not a sound idea. An increase in tax rates now will go against our efforts to stimulate growth, employment, income, consumption and may dampen market revival. Tax on the super rich may send a wrong signal to the economy and may spoil the prospects. We cannot create an unfavourable investment climate for the private sector which in fact provides the engine for growth. The RBI governor remarked that India’s tax rates have reached world standard. Further reductions in the existing tax rates may create complications as that will also upset the resource mobilisation of the government.

Tax policy has to be pro-growth in its orientation which means slashing the tax rates. A lower rate of income tax is expected to leave more of disposable income in the hands of the individuals to promote spending on consumption. Lowering the corporate tax rate is expected to leave more investible funds for investments by the corporate sector. If people incur higher expenditure on goods and services and corporate makes higher investments because of a favourable and growth inducing taxation regime the economy is bound to experience a rising level of economic activities in terms of spending, consumption and market transactions.

This may encourage creation of employment; generate higher income and possibly more savings to facilitate investments in the economy. This big change comes in the economy because of a significant increase in total aggregate demand in response to authorities’ taking the desired taxation measures to stimulate the economy.

But the question remains; can the authorities do it now? Reduction in tax rates will affect revenue mobilisation by the Centre and the states as the states’ receive their respective shares from GST collections from the Centre. Government expenditure on different activities will be reduced. Total demand in the economy emanating from government expenditure will also be affected. The other assumption that more of disposable income left with the households will be spent becomes a little hypothetical as a time like this people are very cautious in their spending in the market. Further the scope for their spending in hotels, restaurants, malls, cinema halls and on tourist destinations is also restricted.

In this connection the fiscal policies announced by the Finance Minister in the last budget where she gave a number of concessions to the taxpayers. Besides that the following measures have been announced in addition to the earlier tax policies to help reviving the economy;

1 Tax deducted at source (TDS) and tax collection at source (TCS) rates reduced by 25% with effect from May 14, 2020 to March 21, 2021. This is expected to release liquidity of ₹50,000 crore.
2 Deadline for filing income tax returns extended to November 30, 2020, and the last date for tax audit extended to October 31, 2020.
3 A ‘fund of funds’ with a corpus of ₹10,000 crore will be set up to help MSMEs with growth potential.
4 The three-month EPF support for businesses and employees — announced for the months of March, April and May — has been extended till August 2020. This will provide liquidity relief of ₹2,500 crore. Statutory PF contribution of both employer and employee will be reduced to 10% each (from the current 12% each) for all establishments covered by EPFO for the next three months.
5 A ₹30,000 crore special liquidity scheme for non-banking finance companies (NBFCs), housing finance companies (HFCs) and micro-finance institutions (MFIs).
6 Power Finance Corporation (PFC) and Rural Electrification Corporation (REC) will help infuse liquidity into fund-starved discoms (power distribution companies) by raising ₹90,000 crore against receivables.
7 All contractors engaged by the government to get extensions of up to six months,
8 In a move aimed at giving relief to builders, regulatory authorities will be asked to extend registration and completion dates for all registered projects (expiring on or after March 25) by six months.

Given the limitations that the Government may face in mobilising resources for the revival and development of the economy what are the other options available to the government? Can the government follow a policy for sale of state undertakings which have become less productive or loss making PSEs and depend on the state budget for their survival? The sale proceeds from these companies may be spent for reviving the economy. The state may even think of transferring the public assets to the private companies on a lease basis. The state may remove the hurdles and facilitate the working of the private sector by simplifying rules and regulations. Certain other routes are also available to the state to raise funds for development.

Tax on petrol and diesel is imposed both by the Centre and the states. Of late the Union government has raised duty on petrol and diesel, the duty levied is at Rs 32.98 a litre of petrol and Rs 31.83 per litre of diesel. States impose their tax on it as well. It varies from state to state. Recently the Odisha government hiked VAT on petrol from 26% to 32% and on diesel from 26% to 28% with effect from May 17, 2020. States in India impose VAT on fuel to raise revenue for the state. Higher imposition of tax on fuel beyond a point may affect transport by raising the cost of transporting goods and services from the producing states to the consuming states.

The government may raise funds from the market through sale of bonds, sale of part of immovable properties like land lying idle for years. The government may decide to disinvest its shares in PSEs, may be from Navaratna companies, may ask the Banks to finance different projects and lend money to finance development. The state may have the money from the non-Banking institutions like the insurance companies LIC and others.

The state at a time of economic crisis like this can borrow funds to carry on with its normal activities along with development activities. The government may even go for external borrowing and borrow from the World Bank, the IMF and other international financial institutions. The standard limit set as a rule for borrowing is normally 60% of in European Union. That is the GDP and Debt ratio should be limited to 60% of GDP. How optimal it is not clear. Some of the most developed countries like the UK and USA have huge debt over 150% to GDP. It is reported that the Debt/GDP ratio may go up to the level of the 250.00 per cent by the end of 2020 in Japan. In India the Debt/GDP ratio stands at 69.62 per cent. We may in the present context think of redefining or raising the limit of the GDP/Debt ratio in view of the present crisis.

The question that needs to be viewed is the limit to the size of the debt a state can raise? Whatever debt is incurred by the state it has to be paid back. We have to look at the size of the economy, production capacity of the economy and its capacity for the repayment of interest and capital amount. We are aware of the fact that the Sovereign debt (the debt of a nation-state with borders and a currency) a nation can raise cannot be unlimited. Government have to pay the loan back. That is the capacity of the government to borrow has certain limits. It is in fact determined by the ability of the state to grow, raise taxes and mobilise more resources from tax and other sources to make payments of the loans incurred.

As we know the state can raise the debt from internal sources called the internal debt and from the external sources called the external debt. Internal debt is categorised into marketable and non-marketable securities. Marketable government securities include G-secs and T-Bills issued through auction. Non-marketable securities include intermediate treasury bills issued to state governments, special securities issued to national Small Savings Fund. However, the fact remains that when debt is incurred for development and used efficiently it increases productive capacity of the economy and becomes self-liquidating in nature.

Apart from borrowing domestically or from overseas, the government may also choose to draw upon its foreign exchange reserves or print additional money to meet the required deficit financing is welcome at the time when the economy is passing through a period of slowdown. It helps in increasing money supply, money circulation, increases liquidity in the economy and is expected to help in adding momentum to the market, level of income and employment. Here, it must be added that through the use of this technique the government not only gets more money supply into the economy there is also a fear that creation of excess money supply may create inflationary conditions in the economy. Caution is therefore required when the state resorts to deficit financing for development in that it is used the right way and succeeds in providing the impetus to economic growth without there being the threat of inflation.

The government may draw from the surplus income accumulating with the Reserve Bank of India. This happened when at the request of the Government the RBI transferred an amount of Rs.1.76 trillion to the government this fiscal. It had earlier transferred an amount of Rs.Rs.1.23 trillion of its surpluses in 2018-19. However frequent banking of the Government on RBI surplus may not set a healthy tradition.

Public expenditure at the present juncture assumes great significance in reviving the market and the economy.  With increased spending on different economic activities like development, infrastructure, education and health and   construction the state can inject more money into the economy.  This is expected to help the economy with money and purchasing power through employment, project works, and different types of economic activities.

The state can raise income, purchasing power and the level of demand to remove the deficiency of demand or the sluggishness of demand by raising public and private consumption and investment expenditure. Therefore additional doses of public expenditure may be of great help to the economy. With higher expenditure we can expect the multiplier and acceleration effect of public spending. This may take care of lower private expenditure and may therefore be helpful for the economy.

The government is making every possible effort to increase employment in the country by increasing public spending. Investment in rural and urban infrastructure will create not only employment possibilities but may also create assets for the economy. Various rural employment programmes have been launched to solve employment problems in rural areas.

Mahatma Gandhi National Rural Employment (MGNRE) comes as a relief to rural poor as it provides employment in villages. Odisha has taken the lead in providing additional employment in drought affected regions by enhancing an additional 50 days of employment per household in 2019-20 in addition to 100 days of employment. Steps have also been taken to create urban wage employment for the urban poor in 114 urban local bodies at an estimated cost of Rs.100 crore.

Public works undertaken in different countries as an anti-depression measure to create employment for the unemployed, create capital assets and to increase purchasing power and create demand for goods and services in the market.

Timing of Public Works: It is important that the state undertakes public works programmes in time to fight the slowdown in an economy. Delay in such works may add to the woes of the state and create confusion about the intentions of the state. Once the decision is taken to do a work the work should be started. Delay in implementing public works programmes may result in the escalation of costs and may impose a heavier burden on the state. Shortage of funds has always been a problem for the state yet the economy must keep on moving on growth path. At a time like this there should be coordination and cooperation of the states with the Centre.

Prime Minister on 12th May, 2020 announced Atmanirvar Bharat with an economic package of Rs.20,000 crore. One can expect this not only to give a big boost to India’s expenditure but also to its own efforts to develop research and technology and become more innovative in using its own technologies to develop its economy.

India is doing its best to fight Covid-19 and reverse the slowdown of the economy by bringing necessary changes in our economic policy particularly in fiscal and monetary policies keeping in view the development of the country and its people.