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Q&A Macro; September 9, 2020

13-Sep-2020Arvind Virmani
Q1. What has to be done to increase public expenditure?

A1: On the manufacturing side, consumer durables, Capital goods and construction are among the worst sufferers from the Pandemic so far. Existing Public investment & infrastructure programs must be accelerated sharply.

Contact Services like Restaurants, hotels, travel, tourism, retail trade, entertainment, are the worst directly affected by the Pandemic. The only way to revive demand for these services is to undertake public health expenditures which will reduce fears of infection and death from the corona virus. Public health expenditures on communicable and infectious diseases and public health education in media and schools must also be stepped up. The “Swatch Bharat” mission should be expanded to promote the modernization of urban, semi-urban sewage systems. State governments should set up similar schemes for semi-rural & rural areas.

A certification system should also be set up to certify Viral load/viral quality of air in public meeting rooms, halls and other large venues. The government should start a big loan program for manufacture & subsidized purchase of Ultra-violet(UV-C) filtration systems for centrally air conditioned spaces and UV lights for cleaning of all closed public spaces, particularly bars, party rooms and public bathrooms. Ventilation improvements in workplaces, offices, shops and commercial establishment could either be part of this program or be included in phase 2.

Q2: Where can the government find the money for a second stimulus?

A2: The Decline in Tax revenue associated with the decline in GDP due to Pandemic & associated lockdown, must be directly or indirectly, monetized by the RBI. Last year's low GDP growth rate can be taken as the benchmark can be used as base line.

Defense capital and R&D expenditures need to be stepped up sharply. Sale of land & shares in Defense PSUs could be used as an endowment for a, “Defense R&D Commission”, on the pattern of the Space/Atomic energy, but with a non-lapsable pool of funding. The promised Strategic industries policy should be formalized and approved so that asset sales can be expanded and pending sales accelerated. There is enough liquidity in the global economy, to attract foreign investment, provided the policy environment is right.

Rationalization and simplification of GST and Personal income tax, can lead to a huge increase in taxes in the next few years to completely offset the current tax revenue reductions, thus allowing a shift in market borrowings from the next two years to this year, without an increase in market rates.

Q3. What do we need to do to revive exports?

A3: We need a dual trade policy to revive exports. A comprehensive import substitution policy with respect to imports from China and a free trade policy with respect to the rest of the world. We should launch a comprehensive Supply chain relocation Initiative (SCRI), to move supply chains from China to free market open economics like, India, USA, EU, Japan, UK, Canada, Australia. The Japan-India-Australia initiative could form the core of this initiative. The Product linked incentive scheme will also be helpful in helping shift supply chains to India, by compensating the loss of sunk costs. Free Trade agreements with US and EU could expedite the shift of value chains linked to these countries.

The SEZ law should be amended to make labor use completely flexible and abolish all controls & regulations on investment in & functioning of business, except those relating to health, safety and environment.

Specific duties on all textiles products and materials should be replaced by a uniform ad-valorem duty, to reduce misclassification, tax evasion & corruption, so that fake exim transactions are eliminated, and genuine textile exports can prosper.

Q4. How can private investment be kick started?

A4. To expect domestic private investment to pick up when capacity utilization has collapsed is to misjudge the macro economy completely. The issue can be examined when capacity utilization rises above 75-80%. The focus has to be on ensuring that there are no mass/group bankruptcies in the worst affected sectors and stimulating private consumption in industries and sectors where demand has fallen sharply, reducing capacity utilization.

However, there is great scope for increasing FDI. In addition to reforms for promoting exports(above), the following reforms will help, (1) Eliminate the implicit tax on electricity supply for industry, (2) Facilitate, the setting up of common pollution treatment facilities in chemicals estates. (3) Reform customs duties to ensure, low uniform import tariffs (10% say) on manufactured parts, intermediates and capital goods used in manufacturing. Import tariffs above 10% should be eliminated unless they pertain to import substitution of items imported from China. (4) Digitize tax compliance by FDI manufacturers to minimize/eliminate tax harassment.

Q5. How can we drive private consumption?

A5. During the Pandemic Demand and supply factors are intimately linked, with excess demand in some geographical pockets and some industries co-existing with excess supply in others. Logistics bottlenecks must be cleared and return of labor facilitated by States. Demand stimulus must focus on consumer goods in automobiles, textiles, electronics goods, metal products, leather goods, apparel and furniture. The proposed GST reforms (below) would also reduce rates on items currently taxed at 28% (18%) to 25% (15%) and thus provide a stimulus. Additional stimulus could be provided by selective reduction of 25% rate to 15%.

There is also a disruption of income generating activities, including among the self-employed (household & tiny) and small sectors. Subsidies directed at the bottom 40% of the population should be integrated into a direct cash transfer scheme in which the rural poor can receive the transfer on their Adhar linked mobile wallet. This can help focus support on those who are desperately in need during the Pandemic.

Further GST simplification and reform & simplification of the Direct tax code (DTC), accompanied by reduction of marginal rates, can help revive growth. The former includes a uniform rate of 15% (say) on all intermediate goods (including electricity), capital goods and most consumer goods (including textiles), except basic foods, health and educational services and automobiles, petrol, diesel and tobacco. Given the collapse in GST and income tax revenues because of the pandemic, nothing we do during 2020-21 will have much effect on tax revenues. However, a rational simplified GST and DTC effective 1st April 2021 will lead to a surge in GST and income tax revenues in 2021-22, because of higher tax buoyancy.

The services negatively affected by fears of corona virus contagion are best revived by a comprehensive program for, (1) improving ventilation in all internal venues, (2) installing UV-C lights in non-AC venues and (3) installing UV filtration systems in all Air conditions halls and public venues. This will also help revive demand for goods and services which have been indirectly affected (including food & beverage) by fall in demand for services like travel, tourism, restaurants, hotels, cinemas, malls, theaters, sports and other forms of entertainment.