Just as the valley of Kashmir was limping back to normalcy after a near six month lockdown from August 2019 to January 2020, it is again under a lockdown from March 21st, 2020. Statistics will bear out the fact that in the last ten years, lockdowns have, more often than not, been the norm in the valley. As such if there is any community in the world that is mentally and socially most equipped to handle the Covid-19 curfew it has to be the Kashmiris! The same cannot be said about the economy of Kashmir.
The Covid-19 curfew, it must be emphasised, is vastly different from all the earlier lockdowns that Kashmir has seen and Kashmiris have endured. Not so much because the earlier lockdown were in protest and this one is protection. It is different because of the nature – being in the crosshair of a health and economic crisis – and the spread of the current lockdown.
I. Diagnostic Review:
The relevant differentiator from an economic point of view is that all the earlier shutdown were localised lockdowns. The valley was shut; or parts of the valley were shut. This present one is a national, indeed, a global lockdown. This difference has huge implications on how it will impact the economic growth of J&K and livelihood of its people. Not to speak of lives. As it turns out J&K currently has the highest per capita incidence of Covid-19 infected.
The J&K economy is an import-dependent export-oriented economy with a very large informal production base. As such, during the extended local shutdowns, the production activity continued even as the intra state trade and transactional activity was curtailed. Quite a bit of the output of the economy – be it from the household enterprises, SMEs, horticulture or the artisanal sectors – was produced. The income generation took place from sales outside the state; in the rest of the country and also in the rest of the world. Added to this, the non-resident kashmiri inflows in the form of remittances also continued.
While local production as well as consumption did decline, the external consumption and remittance inflows did not drop to the same extent. In fact in some cases, the price realisation per unit turned out to be a tad better. The local under-consumption of imports along with higher external consumption of local products as exports fortuitously generated the same positive effects on the economy that a classical import substitution strategy has. This resulted in capping the dwindling profitability thus making the economy operate at a low level of equilibrium.
Today the situation is very different. The external markets — national as well as global – are in a lockdown. Even if the goods and services produced in Kashmir may continue to be produced, the value of these cannot be realised in the market. Not that production will not be impaired. It will be. For instance, this is the season for a lot of farm activity in the horticultural sector; pesticides, pruning and the all like will have to be done. This will not be done and will have a bearing on the scale of production. The remittance inflows will also dry up. It is all this that will deepen the low level equilibrium and convert the incipient crisis into a structural crisis in the Kashmir economy.
None of these issues are being or can be addressed in generic Covid-19 humanitarian relief package for the underprivileged announced by the Government of India. Even the supplementary measures announced by the Reserve Bank of India are by way of liquidity easing and relaxations in the regulatory and prudential norms for the formal business segment.
Not only are these measures partial to be able to deal with the massive body blow to the national economy, they are far too generic to make any meaningful impact on an already ravaged economy like J&K. As such, the specific issue in J&K will need to be addressed by additional measures, some of which top up the national package.
To formulate a J&K specific policy response, it is important to recognise that the August 5th six month shutdown is making the present day Covid-19 lockdown more crippling. To give an example in line with the prevailing situation, it is like being Covid-19 infected just after having had a bad bout of pneumonia! The patient will obviously be even more vulnerable. That is the state of the Kashmir economy.
It has to be understood that the economic distress in J&K is not a corporate balance sheet problem that can be resolved by giving a one quarter breather. It is not even a cyclical recession. It is a structural business crisis; all commercial activities – industrial, artisanal, trade or agricultural — are caught in a low level equilibrium trap.
After six months of a clampdown in August, trade links have been badly disrupted and business networks are in disarray. The business confidence has been shaken. This has resulted in the shrinking of the regular trade cycle of supplier’s credit. This in turn has forced the trade, especially the wholesalers, to exhaust their working capital lines/ cash credit lines making the businesses illiquid.
The net result is that businesses have assets that they can’t sweat because of demand disruptions; they can’t leverage them because of credit limits having run out. They have inventories that can neither be liquidated nor monetised. They have goods that can’t be transported. They have products that can’t be stored. In all this, a lot of money has got locked in. It is this that needs to be unlocked. In other words the problem is different and hence needs to be addressed differently from what is being done nationally.
Further, as it happens, the J&K economy is driven by services sector more than production sectors. A case in point being the trade, tourism and hospitality sectors. These are not only the worst hit by the Covid-19 pandemic, the recovery of these business will be the slowest. So it is fair to assume that unlike in the rest of the country, the recovery process in J&K will not only be very slow but also tardy and arduous.
Yet, the most fascinating feature of the growth dynamic in J&K is the inbuilt virtuous mechanism of income distribution. Provided the right composition of growth is engendered – not the kind of industrial growth that is being contemplated – through support to small enterprises, artisanal, commercial agriculture, trade and tourism, it can be a strong and sustainable revival of the economy and the society.
II. Prescriptive Analysis:
Given this context and the contours of the crisis — a double whammy of lockdown after the shutdown — is a three layered package; a combination of humanitarian aid and relief, rehabilitation and revival stimulating measures.
The UT administration in J&K has been quick off the blocks and taken some very practical steps for giving relief to some sections of the society. The advance release of pension payments and some type of salaries is welcome. Using the corpus of J&K Building and Other Construction Workers Welfare Board is an excellent idea to give relief to the most marginalised. All construction workers being paid from the corpus of the J&KBOCW will not burden the state exchequer and what is more it’s targeting will be near perfect. More such measures are needed.
A well-coordinated multi-pronged policy intervention to address the economic fallout of the pandemic in J&K should comprise of:
a reorientation of the public expenditure policy to ensure relief, safety, aid and support
a private enterprises stabilisation policy, more in the nature of a stimulus package, which will revive, rehabilitate and stimulate economic activity
Reorienting Public Expenditure:
The public spending priorities outlined in the recently announced annual budget for J&K have been overtaken by events. Within the existing level of total expenditure of Rs 1 lakh crore a number of allocative changes can be made to align spending with the current exigencies.
Broadly, three reallocations can be done. First, clear all the past and pending government liabilities. Using the money to defray past liabilities will push a lot of money into the private sector instantly. It will allow them to start fresh work as their liquidity position improves and because of that their banking lines will be freed up. Many of the smaller government suppliers and contractors will become standard accounts and banks will find them lendable. Besides, it will trigger fresh demand in the system.
The Jammu and Kashmir Contractors’ Coordination Committee, for instance, has gone blue in the face crying about the long overdue government payments. The pending liabilities on account of contractor payments alone was over Rs 1,000 crore.
There are a host of public sector undertakings who have not disbursed paid salaries for many months or made vendor payments for years. For example, the J&K Cements has apparently not paid salary for the last 10 months. This is also a form of liabilities that the government is carrying. These also should be cleared.
All told, including other stakeholders, the liabilities, including the institutional, not only in the treasury but also at the departmental level, will be closer to Rs 7,500 crore.
The macro economic impact of clearing all the past liabilities will be huge as it is simply pushing money into the system. The underlying principle of such a policy being that distributional policies will be more impactful in the short run than production oriented policies. A phased mix of the two is ideal; start with the former and bring in the latter in three months’ time.
Administratively, this defraying of liabilities should not be left to a face a departmental rigmarole. A taskforce should be set up under the finance department to clear all pending liabilities of the erstwhile state government within the next 30 days.
Second, convert the existing MGNREGA allocation of about Rs 1,500 crores into a quasi-universal basic income cash transfer to those who has availed of it in the peak season last year. In fact, as was suggested in the Budget of 2018-19, a start should be made combine all the different types of social security payments to create a corpus of about Rs 4,000 crore to be used for cash transfer kind of a Universal Basic Income for the BPL families.
Third, substantially increase the inter se allocation of three sectors viz; health, social welfare and Information Technology by carving out some monies from the capital allocations of sectors like Public Works and Housing and Urban Development. The total capex for Health department is Rs 1,268 crore; less than half of the public works budget! It will not hurt the people much if roads are not macadamised or a few areas remain unconnected for another year. Right now the health budget should be doubled which is what might save the society from ruination.
There should be a special allocation for strengthening the online education facility. This is long overdue. The Rs 1,000 crore capital budget for education is less than that for the home department. In view of the fragile situation and perennial bandhs, if there is one society which needs to push online learning in a big way, it is Kashmir valley. This may also act as a big push to get the Union Government to relent on allowing 4G connectivity!
The Budget has estimated that there are Rs 14,885 crore to be spend on the capital account between October, 2019 and March 31st, 2020. Setting aside debt repayment of Rs 1,000 crore, it is highly improbable that the remaining Rs 14,000 crore would have been spend.
It is a fact that from August, 2019 to January 2019, the state, in particular the valley, was under a complete lockdown. There was no developmental work taking place. Even if these monies were to be re-appropriated for the next fiscal, the pandemic will make it very difficult to ramp up any capital works till the end of second quarter. After which winter will act as a natural constraint
So it is not a challenge in terms of finding money. The real challenge will be that the allocations are scheme specific from a funding perspective; as in it is not untied money. It is earmarked to a particular scheme. But in the given situation that classificatory issue can be resolved with the Union Finance Ministry.
This will also mean diverting money from capital account to the revenue account but in times of a grave crisis like this one it is not, nor should it be seen as, a negative in fiscal management.
Budgetary allocations across functional classifications drive economic activity in the overall economic context which is why there are cyclical and contra-cyclical fiscal policies. Given that the absorptive capacity of the J&K economy is low, a capex spending will take far more time to fructify and work its way into the economic system. By then it might be too late.
Fourth, the UT administration should approach the Reserve Bank of India to increase the limit of Ways and Means Advances facility. The administration must secure its own lines of credit before seeking to help revive the economy and the businesses.
Private Sector Stabilisation Policy:
First, instead of postponing business liabilities, which is what the RBI’s package does, the UT administration must help extinguish the existing and recurring liabilities of the private sector.
The liabilities of businesses across the board in J&K that need to be specifically addressed in a graded manner following the “payment waterfall” mechanism based on the type of payments due.
In this, the most important are the statutory payments, which include both direct as well as indirect taxes. Ideally, for the period August 2019 to March 2020, on grounds of natural justice, the indirect taxes should be waived off. This will cost the Government of India Rs 6,894 crore. For the next fiscal, i.e 2020-21, whatever is done nationally for indirect taxes under the expected stimulus package would automatically apply here as well. It might, however, be good idea, to provide tax credits in J&K for the year 2020-21 with a three year time frame.
Over the last five years J&K contributed Rs 8,084 crore by way of direct taxes. It had of course received back much more as its state share in these taxes. Leaving income tax untouched, the UT administration should seek an exemption of one year from the levy of corporate tax in J&K. As it is there is a tax holiday as a part of the industrial policy package. This amount will be less than a couple of hundred crores this year.
There are no reasonable grounds for an income tax rebate than what has been provided nationally as it is mostly on account of salaries in J&K. And that too a large proportion is government servants who are not facing any distress or disruption in their incomes. The total tab on account of statutory payment relief will be will not be more than Rs 7,500 crore.
Next in line are the regulatory payments which include bank interest on borrowings and user charges on services provided by the government. For J&K, the RBI package is a non sequitur. It is designed to help the cash flow management of a businesses, in particular corporatized businesses. The problem is that J&K has micro and mini enterprises and not corporate entities. Also, in Kashmir there has been virtually no cash flow generation over the last 8 months or so! The cash credit limits of businesses with their banks will bear testimony to this. They must all be exhausted if not being overdrawn.
In the RBI package, not only will interest continue to accrue during the moratorium period, it will only increase repayment maturity by 3 months. Past experience suggest that deferring the debt servicing over the tenor of the loan in an uncertain business environment like in J&K, causes further distress. Repayments get bunched without any pick up in business. Also, the RBI package is discretionary; it is not mandatory. Bank will allow moratorium to operate on a case by case basis depending on how the cash flows of an account have been impaired by the Covid-19 crisis.
The principle to be followed with respect to interest payments of business in Kashmir should be: don’t defer, help defray. The reality to be faced is that for the period of the August shutdown there has to be a haircut on the loans taken by business in Kashmir. Given the reasons for the shutdown, it is only fair that it must be borne by the Union government. However, the RBI and the commercial bank can be called to chip in.
The way to do this is to break up the rate of interest (and consequently the interest outgo of business) into three parts: the bank’s contracted cost of funds, the regulatory and prudential cost and the mark up. The government must bear contracted cost of fund component. The RBI must allow the bank a regulatory forbearance for the regulatory cost of capital and on its part the bank must forgo its mark-up.
This will circumvent the moral hazard problem which accompanies debt waiver or write off and also ensure that the distress is not shifted from the business to the bank. As it is the main lender in the valley, the J&K Bank, is under stress for asset quality.
Having addressed the legacy liability issues, the UT administration needs to take steps to stimulate economic activity. A stimulus package needs to focus on the specific banking assistance.
The focus of proactive banking at this stage ought to be on releasing working capital lines which have got jammed. Ideally, in view of the financial squeeze, interest on all working capital loans of Rs 25 lakhs and less, should be suspended. But that will require approval of the RBI which is unlikely to happen because of the implications elsewhere in the country.
However, a two-fold strategy that will not require the regulators permission but can be a Board level decision in the banks. First, is to increase the limit for all standard banking accounts. This can be done by increasing the drawing power by 25 per cent, and also removing the margin of 25 per cent. Second, the UT administration should do an interest subvention of 300 basis points (3 per cent) on working capital and working capital term loans of up to Rs 1 crore for as long as the Covid-19 crackdown lasts.
For the trade intensive economy, during periods of downturn what locks up liquidity is the inventory build-up; be in the shops or stores. To stimulate economic activity, the government should introduce inventory financing in the financial institutions that it has a majority stake in. Besides J&K Bank, it will be good idea to do it through the dormant and distressed State Finance Corporation, the inactive Development Finance Corporation and the Regional Rural Banks. Warehouse receipt financing will give a huge fillip to horticulture and the crafts sectors.
The UT administration should convene an SLBC meeting and get the banks, with J&K Bank in the lead, to draw out a plan for financing receivables of businesses and facilitate factoring. They must aggressively pursue rent, receivable and bill discounting. Any business that has an authenticated receivable from a credible and creditworthy partner should be discounted. This will ease the liquidity position of the small and medium enterprises.
At the same time, the SLBC should resolve that to ensure even smaller businesses get their payment from their customers. To facilitate factoring , all banks should be asked to get hooked on to the Trade Receivables Electronic Discounting System, a factoring platform in which small business list their invoices and participating banks take over bill collection and pay the small business upfront
To help small businesses retain their employment levels, operational and obligatory payments, which are the variable costs of a business enterprises like salary and input costs should be financed, not funded. This can be done by creating an overdraft facility earmarked to ensure that the wage bill of enterprises is financed. The end use for this must be monitored. Incentivize retention of employees by linking over-draft to the size of the average salary of the last 1 year. The same principle should be adopted for inputs including power and raw materials.
….a thought in lieu of a conclusion
Even though financing sources have been identified along with the proposals made here, the question which will be asked, legitimately so, is where will the money come from?! Before committing to spend, even if on survival, it is important to find resources for it.
The UT Budget for 2020-21 has earmarked Rs 4,500 crore as “grant for allowances”. Presumably, this is the allocation for allowances for erstwhile state government, now the UT employees, to bring them at par with the central government employees. This can surely wait.
At the very least, these allowances can be impounded for three years and money used for rebuilding. When the economy recovers, the taxes become buoyant, the employees can claim their allowances.
However, the employees giving up these allowances to be used for the revival and reconstruction of J&K will be a decision in enlightened self-interest for a variety of reasons. It will change the narrative for ever.
Enroute to a level where we, as a society, take responsibility for ourselves and collectively resolve our problems, this could be the first step; besides staying home, of course! The symbolism of this gesture will yield dividends that go beyond the realm of business into the realm of society and social behaviour. Something good can come out of this paroxysm of alarm, anxiety and grief; it will make us realise the positive character of our own civil society. And restore our confidence in ourselves. Eventually, it may even trigger a new self-critical politics of nation building in fortitude.
11 point Agenda
Reorienting public expenditure:
- Clear all the past and pending government liabilities.
- Convert the existing MGNREGA allocation of about Rs 1,5,00 crores into a quasi-universal basic income cash transfer
- Create a corpus of about Rs 4,000 crore combining social welfare spending for a Universal Basic Income for the BPL families.
- Increase the inter se allocation of three sectors viz; health, social welfare and Information Technology
- Approach the Reserve Bank of India to increase the limit of Ways and Means Advances facility.
Private Sector Stabilisation Policy.
- For the period August 2019 to March 2020, waive off indirect taxes
- UT administration should seek an exemption of one year from the levy of corporate tax in J&K.
- Don’t defer, defray interest payment. Union government, RBI and the commercial banks to fund. .
- Increase the limit for all standard banking accounts by increasing the drawing power by 25 per cent, and removing the margin of 25 per cent.
- Interest subvention of 300 basis points (3 per cent) on working capital of up to Rs 1 crore.
- Financing Receivables of businesses and Facilitate Factoring. To stimulate economic activity, the government should introduce inventory financing