Stimulating demand in India through construction sector

Raising demand through construction sector stimulus

Ajay Shankar writes in Financial Express: [...]The construction sector has a large multiplier effect and is labour-intensive. So, it is a natural choice. There are a large number of incomplete housing projects with developers in difficulty/bankruptcy. The FM had announced a financing package last year to mitigate the economic downturn. But progress has been slow. There were issues with the fine print of the sanction orders. A simple but bold approach could work immediately; a takeover of all the incomplete projects from the developers, and getting the banks to immediately provide financing for completion at current costs with a government guarantee, could work. A czar could be designated with a mandate to get actual work started within 45 days of the end of the lockdown, and completion within 18 months of the commencement of work.

Preparatory work for takeover, tying up finances and settling contractual terms with the construction agencies can be done now. This would not need budgetary outflows. As the economy recovers and demand for housing picks up later, then the land bank with the developers would become liquid assets and debt may be comfortably serviceable.

A step up in the ongoing affordable housing construction programme could also generate additional demand. The same would also apply to the rural road programme. The present crisis has highlighted the inadequacy of hospital care capacity. While efforts are on to create temporary additional capacity on a makeshift basis, there is a need to increase capacity by 25-50% on an urgent basis. This merits funding from the stimulus package. This would generate demand for the construction industry as well as for the supply of medical equipment and furnishings.

Food subsidy, fiscal conundrum and mapping of migrant workers in India

Excess stocks of the Food Corporation of India must be released to the poor

Jean Dreze writes in The Indian Express: Everyone knows that the country has large food stocks, and that some of this could be used to protect people from hunger during the coronavirus crisis. The enormity of the situation, however, has escaped many observers. [...] Last year, in June (when the stocks normally peak), foodgrain stocks crossed 80 million tonnes — more than three times the buffer-stock norms. This year, they have reached a staggering 77 million tonnes in March, before the rabi harvest, when food stocks typically rise by another 20 million tonnes or so. Public food storage on this scale has never happened in India before. Meanwhile, the shadow of hunger looms large as the lockdown devastates people’s livelihoods. The finance minister did not do them a big favour by doubling PDS rations for the next three months — something like that was needed, in any case, to make space in FCI’s overflowing godowns for rabi procurement. A serious relief package would include releasing excess stocks to the states in large quantities.

Why is it proving so difficult? One reason has to do with food-subsidy accounting. The food subsidy essentially pays for the losses FCI makes when it buys at minimum support prices and sells at much lower PDS prices, and also the money spent on transportation and storage. As it happens, however, the food subsidy does not enter the central government’s accounts until stocks are released. That is why the finance minister had to budget Rs 40,000 crore in her relief package simply to release some excess food stocks into the PDS. In economic terms, releasing excess stocks is costless, and even saves money. But in accounting terms, it is expensive. This anomaly makes it harder to release food stocks: Credit-rating agencies watch the fiscal deficit, not the food economy.

[...]In short, food transfers are bound to play a big role in keeping poor people alive in the next few months. Food schemes such as the PDS and mid-day meals are in place in most villages, it is mainly a matter of reinforcing them. For this to happen, the central government must unlock the godowns and give plenty of food to the states. Never mind if the step takes the fiscal deficit a notch higher due to muddled accounting.

Devesh Kapur and Arvind Subramanian outlined five measures to secure fiscal space needed to address the economic crisis wrought by the COVID-19 pandemic.

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Govt begins mapping of migrant workers for relief measures

From Business Standard: The central government has begun one of the most comprehensive exercises to map migrant workers scattered across the country — in relief camps, on their employers’ premises, or in clusters where they reside. The government wants to create a database of millions of such workers to ascertain whether a relief package could be announced for the most affected segment of the workforce due to the national lockdown to contain the spread of coronavirus (Covid-19), a senior labour and employment ministry official said. The Union home ministry and the labour ministry have asked state governments to coordinate with the chief labour commissioner’s (CLC’s) office to give a comprehensive data of all the migrant workers by April 11.

[...]According to the central government’s estimates, part of its response to a petition filed by activists Anjali Bhardwaj and Harsh Mander in the Supreme Court, around 1.03 million people are residing in relief camps. But this might be an underestimation because the information was not captured from all the shelter homes. Additionally, at least 1.5 million workers are being provided shelter by employers across the country.

[...]According to official estimates, 500,000-600,000 workers had to walk back home on foot because public transport was not available to them. They travelled miles on foot to reach their villages. Hundreds of thousands of migrant workers are still living in shelter homes set up by various state governments in India, while the rest are under quarantine facility before they are allowed to meet their families.

Migrant crisis in India: 

• 0.5 to 0.6 million workers walked on foot to villages after lockdown
• 8.4 million were given food by government and NGOs
• 1.03 million are in relief camps or shelter homes
• 1.5 million given shelter or food by employers
• 22,567 shelter homes (Kerala accounts for 70% of them)

Financing COVID-19 related deficit in India and the impact of COVID-19 on Nepali economy

Fiscal space: Not if but how

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)

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COVID-19 sledgehammers economic activities

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.”

Indian economy to slowdown in FY2021, high unemployment rate, and 1.25 billion workers at risk of losing jobs

SBI pegs FY21 growth at 2.6%, say govt must monetize deficit

From Business Standard: SBI house economists have pegged the growth forecast for January-March at 2.5 per cent and for 2020-21 at 2.6 per cent given the massive disruptions to businesses and the economy due to the COVID-19-driven lockdowns, which has upended at least 70 per cent of the economy.[...]The 21-day lockdown will cost the economy at least Rs 8 trillion, according to a report by SBI Research, which says at least 70 per cent of the economy is on a standstill because of this. 

We estimate another 1.7 per cent impact on real GDP because of the 21-day lockdown in FY21 resulting in at least 70 per cent of the economy at a standstill. We peg FY21 GDP estimate at 2.6 per cent, with a clear downward bias, with Q1 of FY21 GDP numbers witnessing a contraction. FY20 GDP estimates could also see a downward revision from 5 per cent to 4.5 per cent with Q4 growth at 2.5 percent, SBI Research said in a note, adding pegged the total cost of the 21-lockdown at Rs 8.2 lakh crore in nominal terms and output loss at 4 per cent on a conservative approach. But they are quick to add that the economy could rebound if a stronger stimulus is offered.

Given the low market appetite for borrowing, it is imperative that government uses the clause given in FRBM Act and monetize the deficit with the RBI subscribing to the primary issues of the Central government debt and fulfill the supply-demand gap in FY21, the report said. In FY2020, total borrowing by the Centre and states stood at Rs 13.5 lakh crorethe Centre at Rs 7.1 lakh crore and the states combined Rs 6.4 lakh crore.

Given at least estimated 4 per cent slippage in GDP/Rs 8 lakh crore, we expect the Centre and the states could borrow conservatively close to Rs 20 lakh crore in FY21. Thus, it is a must that RBI monetizes the deficit, using the national calamity clause given the stressed market absorption capacity, it says, adding this will add up to 2.5-3 percent of GDP and the government must show it separately as an off-balance sheet item in the budget like a 'COVID bond'.

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Covid-19 may push 400 mln Indians to poverty: ILO

From Mint: “In India, Nigeria and Brazil, the number of workers in the informal economy affected by the lockdown and other containment measures is substantial. In India, with a share of almost 90% of people working in the informal economy, about 400 million workers are at risk of falling deeper into poverty during the crisis. “Current lockdown measures in India, which are at the high end of the University of Oxford’s COVID-19 Government Response Stringency Index, have impacted these workers significantly, forcing many of them to return to rural areas," it added.

The ILO warning corroborates data from Indian think tanks, which shows how unemployment has tripled in urban India and rural hinterlands within a span of past three weeks. The Centre for Monitoring of Indian Economy has said unemployment rate in India was 23.4% in the week ended 5 April. CMIE data showed that while urban unemployment rate was 30.9%, rural unemployment rate was over 20% and economists have warned that things may only worsen in rural India due to reverse migration in last two weeks.

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ILO jobs report (COVID-19 ILO Monitor 2nd edition)

According to the new study, 1.25 billion workers are employed in the sectors identified as being at high risk of “drastic and devastating” increases in layoffs and reductions in wages and working hours. Many are in low-paid, low-skilled jobs, where a sudden loss of income is devastating. Worldwide, two billion people work in the informal sector (mostly in emerging and developing economies) and are particularly at risk. The estimates are based on ILO "nowcasting" model (uses real-time economic and labor market data to predict the loss in working hours in Q2 2020).

Large-scale, integrated, policy measures are needed, focusing on four pillars: supporting enterprises, employment and incomes; stimulating the economy and jobs; protecting workers in the workplace; and, using social dialogue between government, workers and employers to find solutions, the study says.

The most highly affected activities include accommodation and food services; real estate, business and administrative activities; manufacturing; and wholesale and retail trade. Medium to highly affected activities include arts, entertainment and recreation and other services; and transport, storage and communication. Medium affected activities include mining and quarrying; financial and insurance activities; and construction. Low affected activities include agriculture, forestry and fishing; utilities; public administration and defence; human health and social work activities; and education. 

The highly affected activities are labor intensive, and employ millions of low-paid and low-skilled workers.

Expenditure reallocation, shortage of workers in agriculture, thinking beyond the lockdown

Government to divert Rs 136 billion budget to anti-Covid-19 measures

From The Kathmandu Post: The government has decided to divert Rs 136 billion from its annual budget allocations to fund efforts to combat the effects of the coronavirus epidemic. The finance ministry last week notified government agencies that the budget allocated under 14 headings such as land and vehicle procurement and organisation of seminars has been frozen to divert funds to prevent the spread of the contagious virus and to treat the infected.

However, the entire amount may not be available to the government as revenue collection is also expected to suffer due to the epidemic, and the government is yet to ascertain the size of liabilities already created based on the original budget. [...]In its budget for FY 2019/2020, the government had allocated the Rs 136.60 billion, which it now plans to divert, under 14 titles such as recurrent contingencies (Rs 29.39 billion), programme expenses (Rs28.26 billion) and land acquisition (Rs 28 billion).

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Winter crops lie unharvested in the fields as the lockdown forces farmers indoors

From The Kathmandu Post: The nationwide lockdown, currently imposed until April 7, has forced tens of thousands of farmers indoors and away from their fields while also creating a shortage of hired labourers to work in the fields. The agriculture sector, which contributes 27 percent to the country's GDP, has already been affected by the comparatively low summer output, of paddy in particular, caused by the delayed monsoon, floods and disease.

Now, the Covid-19 pandemic has further dampened the prospects of a good spring harvest to make up for the summer months. Wheat is cultivated in over 900,000 hectares of land and it is currently harvest season. "The crops will soon wither away,” said Chaudhary. “But what else can we do but let them die? It’s not safe to go outside given the current situation.

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Raghuram Rajan on restarting the Indian economy after the lockdown

From The Economic Times: We should now plan for what happens after the lockdown, if the virus is not defeated. It will be hard to lockdown the country entirely for much longer periods, so we should also be thinking of how we can restart certain activities in certain low infection regions with adequate precautions. Restarting requires better data on infection levels, as well as measures to protect workers returning to work, such as temperature checks of workers (though this will not catch non-symptomatic carriers), uncrowded transport, personal protection equipment, adequate distancing at work, as well as measures to identify and contain new infections. Healthy youth, lodged with appropriate distancing in hostels at the workplace, may be ideal workers for restarting.

[...]In the meantime, India obviously needs to ensure that the poor and non-salaried lower middle class who are prevented from working for longer periods can survive. Direct transfers to households may reach most but not all, as a number of commentators have pointed out. Furthermore, the quantum of transfers seems inadequate to see a household through a month.

The state and Centre have to come together to figure out quickly some combination of public and NGO provision (of food, healthcare and sometimes shelter), private participation (voluntary moratoria on debt payments and a community-enforced ban on evictions during the next few months), and direct benefit transfers (DBTs) that will allow needy households to see through the next few months. We have already seen one consequence of not doing so – the movement of migrant labour. Another will be people defying the lockdown to get back to work if they cannot survive otherwise.

Our limited fiscal resources are certainly a worry. However, spending on the needy at this time is a high priority use of resources, the right thing to do as a humane nation, as well as a contributor to the fight against the virus. This does not mean that we can ignore our budgetary constraints, especially given that our revenues will also be severely affected this year. [...]A ratings downgrade coupled with a loss of investor confidence could lead to a plummeting exchange rate and a dramatic increase in long term rates in this environment, and substantial losses for our financial institutions.

So we have to prioritise, cutting back or delaying less important expenditures, while refocussing on immediate needs. At the same time, to reassure investors, the government could express its commitment to return to fiscal rectitude, backing up its intent by accepting the setting up of an independent fiscal council and setting a medium term debt target, as suggested by the NK Singh committee.

[...]We need to think of innovative ways in which bigger viable ones, especially those that have considerable human and physical capital embedded in them, can be helped. SIDBI can make the terms of its credit guarantee of bank loans to SMEs even more favourable, but banks are unlikely to want to take on much more credit risk at this point. The government could accept responsibility for the first loss in incremental bank loans made to an SME, up to the quantum of income taxes paid by the SME in the past year. This recognises the likely future contribution of the SME to the government exchequer, and rewards it with easier access to funds today. Of course, this helps the SME only if the lending bank is prohibited from directing the SME to use the guaranteed loan to repay the bank’s past loans.

[...]Banks, insurance companies, and bond mutual funds should be encouraged to buy new investment grade bond issuances, and their way eased by the RBI agreeing to lend against their high quality bond portfolios through repo transactions. The RBI Act will have to be changed to enable the RBI to undertake these transactions, and it will have to apply suitable haircuts to these portfolios to minimise its credit risk, but it will be a much needed support to corporate borrowing. The government should also require each of its agencies and PSUs, including at the state level, to pay their bills immediately, so that private firms get valuable liquidity.

[...]The RBI has flooded the banking system with liquidity, but perhaps it needs to go beyond, for instance lending against high quality collateral to well managed NBFCs. However, more liquidity will not help absorb loan losses. NPAs will mount, including in retail loans as unemployment rises. The RBI should consider a moratorium on financial institution dividend payments so that they build capital reserves. Some institutions may nevertheless need more capital, and the regulator should be planning for that.

Impact of COVID-19 in East Asia and the Pacific

In its latest East Asia and Pacific Economic Monitor (April 2020), the World Bank argues that COVID-19 presents an unusual combination of disruptive and mutually reinforcing events, and that significant economic pain seems unavoidable in countries with excessive indebtedness. It presents an unusual combination of a supply and demand shock due to the preventive behavior of individuals and the transmission control policies of governments. 

Three types of activities are immediately affected: (i) collective high-density production (workers work closely together in manufacturing factories); (ii) collective high-density consumption (services activities such as sport, music, restaurant, travel, etc); and (iii) proximate production and consumption (suppliers meeting consumers activities such as personal care, health care, restaurants, retails, etc). 

The immediate effect was first on the Chinese economy, where lockdown and transmission control policies disrupted supply and froze demand, and affected other countries through flows of trade and tourists. As the virus spread beyond China, other governments took similar actions, leading to severe dent in demand and supply. This is amplifying the mutual shocks through trade and tourist flows, and finance stress. 

Under a baseline scenario, developing EAP growth is projected at 2.5% for 2020, but -0.5% under lower case scenario. PRC’s is expected to grow at 2.3% and 0.1%, respectively under the two scenarios. Baseline refers to a scenario of severe growth slowdown followed by a strong recovery. Lower case refers to a scenario of deeper contraction followed by sluggish recovery. 

The COVID-19 shock will also have impact on poverty and welfare through illness, death and lost incomes. Under the baseline scenario. About 24 million fewer people are estimated to escape poverty across developing EAP in 2020. However, under the lower-case scenario, poverty is estimated to increase by about 11 million people. Poverty rate refers to US$5.50 per person per day (2011 PPP) threshold. 

Effect on households is country-specific: households in Vietnam linked to manufacturing reliant on imported inputs will see poverty rates double but households depending on tourism income will be the hardest hit in the Pacific Islands. Developing EAP refers to Cambodia, China, Indonesia, Lao People’s Democratic Republic (PDR), Malaysia, Mongolia, Myanmar, Papua New Guinea, the Philippines, Thailand, Timor-Leste, Vietnam, and the Pacific Island Countries.

The WB recommends countries to flatten two kinds of curves: (i) flatten the pandemic curve by limiting transmission through lockdowns and travel bans, and (ii) flatten the recession curve by taking appropriate monetary, fiscal and structural measures. It also recommends augmentation of health capacity to fulfill potentially overwhelming demand. 

On macroeconomic policy, it argues that an expansionary policy is less effective given that the lockdown and social distancing limit production and employment. So, fiscal measures should initially focus on social protection to cushion against shocks, especially for the most economically vulnerable. These include subsidies for sick pay, expenditure on healthcare, expanded safety nets, cash and in-kind transfers when the informal sector is large, schooling feeding programs, and employment support to reintegrate into the economy among others. These would help to limit long-term human capital losses due to temporary deprivations. Also note that marginal propensity to consume of low-income households is reasonably high. 

On financial sector, it recommends easier access to credit for households to smooth consumption, and easier access to liquidity for firms to help them survive the disruption. However, regulators should ensure risk disclosure and clearly communicate supervisory expectations to avoid financial instability, especially when debt levels are high. For low-income countries, debt relief will be essential. 

On trade policy, the recommendation is to stay open and not resort to export restrictions, especially export of coronavirus-related medical products. 

IMF enhances debt relief trust to support low-income countries

The IMF enhanced its Catastrophe Containment and Relief Trust (CCRT) to enable the Fund to provide debt service relief for its poorest and most vulnerable members. The CCRT enables the IMF to deliver grants for debt relief benefitting eligible low-income countries in the wake of catastrophic natural disasters and major, fast-spreading public health emergencies. 

The IMF now allows all member countries with per capita income below the World Bank’s operational threshold for concessional support to qualify for debt service relief for up to two years. This would apply when a life-threatening global pandemic is inflicting severe economic disruption across the Fund’s membership and is creating balance of payments needs on such a scale to warrant a concerted international effort to support the poorest and most vulnerable countries.

The COVID-19 pandemic is bound to create balance of payments crisis (declining exports, remittances, FDI, etc) and fiscal stress (lower revenue, higher expenditure) in some low-income countries.