In an op-ed published in Business Standard today (ungated version here), Devesh Kapur and Arvind Subramanian argue that the Indian government will have to find the funds/revenue to respond to the economic crisis wrought by the spread of COVID-19 pandemic. The question of fiscal space in India is not about 'if' but 'how'. They propose five ways of financing additional expenditures over the next 12 months:
- Reduction in other expenditures (Rs 1-1.5 trillion): Cut recently initiated projects and fund those near completion. Don't spend money in reviving poorly functioning public enterprises.
- Foreign borrowing, from official sources and non-resident Indians (NRIs; Rs 1-1.5 trillion): Borrow from multilateral banks (WB, ADB, etc) and also ask them to repurpose existing loans. Make a contingency plan for seeking quick disbursing funds from the IMF. Tap NRIs on special bonds.
- Public financing by issuing g-secs (including to banks and LIC) (Rs 5 trillion): Raise moeny from the public by conventional bond issuance. Allocate some of the new borrowing to PSBs and LIC.
- Monetary financing or “printing money” (Rs 1-1.5 trillion): Ask RBI to directly buy government securities and state government bonds. Make this direct purchase a one-off event given the exogenous shock (i.e, shock is not due to fiscal profligacy). This should not shoot up inflationary pressures and would also not incentivize government to monetize fiscal deficit repeatedly.
- Mobilizing additional resources via raising taxes and cutting subsidies (Rs 1-1.5 trillion)
Rupak D Sharma writes in The Himalayan Times: [..]If farmers do not get the input on time, agricultural output can dip by 20 to 25 per cent, according to Bhairav Raj Kaini, former director general of Department of Agriculture. A drop in agricultural yield, especially paddy, will hit Nepal’s gross domestic product in the next fiscal year as well, as it accounts for more than a fourth of the country’s total economic output.
[...]The coronavirus crisis has now threatened to eat into this steady income source, as Delhi- to Dubai-based firms are gradually sending Nepali workers, especially those employed in service sector, on unpaid leave or are laying them off. “We have heard news of layoffs and unpaid leaves. But most of the firms in the Gulf and Malaysia, where a big chunk of Nepalis are employed, have not taken such measures for humanitarian reasons. This, however, does not mean there will be no layoffs going forward,” said Kumar Prasad Dahal, director general of the Department of Foreign Employment, adding, “Massive job cuts abroad are inevitable considering the damage the coronavirus crisis has caused to economies.”
This is not a good sign for Nepal that receives around $8 billion in remittances per year, which, as a share, is around a fourth of GDP. A sharp drop in remittance inflow would not only reduce household spending and erode living standard, but also trigger a liquidity crisis.
[...]The unique aspect of the latest economic crisis is that it was not triggered by demand shock but by rapid fall in supply. Production across the globe has dropped or come to a complete halt not because of a slump in demand but because of rapid closure of production units. This has disrupted supply chains and rendered many jobless. This has subsequently forced consumers to tighten their purse strings, triggering a demand shock. This drop in demand may encourage suppliers to further cut back on production leading to more job cuts.
“This is a vicious cycle and is taking the shape of a supply-demand doom loop. This can disrupt economic activities, preventing the economy from reaching its full potential,” said economist Chandan Sapkota. “The country can come out of this precarious macroeconomic situation only if the government launches an effective rescue package that can provide relief to sectors across the board.”
