Combating Covid-19: The Economic Dimension

Just as the valley of Kashmir was limping back to normalcyafter a near six month lockdown from August 2019 to January 2020, it is againunder a lockdown from March 21st, 2020. Statistics will bear out the fact thatin the last ten years, lockdowns have, more often than not, been the norm inthe valley. As such if there is any community in the world that is mentally andsocially most equipped to handle the Covid-19 curfew it has to be theKashmiris! The same cannot be said about the economy of Kashmir.

The Covid-19 curfew, it must be emphasised, isvastly different from all the earlier lockdowns that Kashmir has seen andKashmiris have endured. Not so much because the earlier lockdown were inprotest 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 thecurrent lockdown.

   

I. DiagnosticReview:

The relevant differentiator from an economicpoint of view is that all the earlier shutdown were localised lockdowns. Thevalley was shut; or parts of the valley were shut. This present one is anational, indeed, a global lockdown. This difference has huge implications onhow 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 percapita incidence of Covid-19 infected.

The J&K economy is an import-dependentexport-oriented economy with a very large informal production base. As such,during the extended local shutdowns, the production activity continued even asthe intra state trade and transactional activity was curtailed. Quite a bit ofthe output of the economy – be it from the household enterprises, SMEs,horticulture or the artisanal sectors – was produced. The income generationtook place from sales outside the state; in the rest of the country and also inthe rest of the world. Added to this, the non-resident kashmiri inflows in theform of remittances also continued.

Whilelocal production as well as consumption did decline, the external consumptionand 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 localunder-consumption of imports along with higher external consumption of localproducts as exports fortuitously generated the same positive effects on theeconomy that a classical import substitution strategy has.  This resultedin capping the dwindling profitability thus making the economy operate at a lowlevel of equilibrium.

Today the situation is very different. The externalmarkets — national as well as global – are in a lockdown. Even if the goods andservices produced in Kashmir may continue to be produced, the value of thesecannot be realised in the market. Not that production will not be impaired. Itwill be. For instance, this is the season for a lot of farm activity in thehorticultural sector; pesticides, pruning and the all like will have to bedone. 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 thelow level equilibrium and convert the incipient crisis into a structural crisisin the Kashmir economy.

None of these issues are being or can be addressedin generic Covid-19 humanitarian relief package for the underprivilegedannounced by the Government of India. Even the supplementary measures announcedby the Reserve Bank of India are by way of liquidity easing and relaxations inthe regulatory and prudential norms for the formal business segment.

Not only are these measures partial to be able todeal with the massive body blow to the national economy, they are far toogeneric to make any meaningful impact on an already ravaged economy likeJ&K. As such, the specific issue in J&K will need to be addressed byadditional measures, some of which top up the national package.

To formulate a J&K specific policy response, itis important to recognise that the August 5th six month shutdown is making thepresent day Covid-19 lockdown more crippling. To give an example in line withthe prevailing situation, it is like being Covid-19 infected just after havinghad a bad bout of pneumonia! The patient will obviously be even morevulnerable. That is the state of the Kashmir economy.

It has to be understood that the economic distressin J&K is not a corporate balance sheet problem that can be resolved bygiving a one quarter breather. It is not even a cyclical recession. It is astructural 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, tradelinks have been badly disrupted and business networks are in disarray. Thebusiness confidence has been shaken. This has resulted in the shrinking of theregular trade cycle of supplier’s credit. This in turn has forced the trade,especially the wholesalers, to exhaust their working capital lines/ cash creditlines making the businesses illiquid.

The net result is that businesses have assets thatthey can’t sweat because of demand disruptions; they can’t leverage thembecause of credit limits having run out. They have inventories that can neitherbe liquidated nor monetised. They have goods that can’t be transported. Theyhave products that can’t be stored. In all this, a lot of money has got lockedin. It is this that needs to be unlocked. In other words the problem isdifferent and hence needs to be addressed differently from what is being donenationally.

Further, as it happens, the J&K economy isdriven by services sector more than production sectors. A case in point beingthe trade, tourism and hospitality sectors. These are not only the worst hit bythe Covid-19 pandemic, the recovery of these business will be the slowest. Soit is fair to assume that unlike in the rest of the country, the recoveryprocess in J&K will not only be very slow but also tardy and arduous.

Yet, the most fascinating feature of the growthdynamic in J&K is the inbuilt virtuous mechanism of income distribution.Provided the right composition of growth is engendered – not the kind ofindustrial growth that is being contemplated – through support to smallenterprises, artisanal, commercial agriculture, trade and tourism, it can be astrong 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; acombination of humanitarian aid and relief, rehabilitation and revivalstimulating measures.

The UT administration in J&K has been quick offthe blocks and taken some very practical steps for giving relief to somesections of the society. The advance release of pension payments and some typeof salaries is welcome. Using the corpus of J&K Building and OtherConstruction Workers Welfare Board is an excellent idea to give relief to themost marginalised. All construction workers being paid from the corpus of theJ&KBOCW will not burden the state exchequer and what is more it’s targetingwill be near perfect. More such measures are needed.

A well-coordinated multi-pronged policyintervention to address the economic fallout of the pandemic in J&K shouldcomprise of:

a reorientation of the public expenditure policy toensure relief, safety, aid and support

a private enterprises stabilisation policy, more inthe nature of a stimulus package, which will revive, rehabilitate and stimulateeconomic activity

Reorienting Public Expenditure:

The public spending priorities outlined in therecently 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 ofallocative 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 todefray past liabilities will push a lot of money into the private sectorinstantly. It will allow them to start fresh work as their liquidity positionimproves and because of that their banking lines will be freed up. Many of thesmaller government suppliers and contractors will become standard accounts andbanks will find them lendable. Besides, it will trigger fresh demand in thesystem.

The Jammu and Kashmir Contractors’ CoordinationCommittee, for instance, has gone blue in the face crying about the longoverdue government payments. The pending liabilities on account of contractorpayments alone was over Rs 1,000 crore.

There are a host of public sector undertakings whohave not disbursed paid salaries for many months or made vendor payments foryears. For example, the J&K Cements has apparently not paid salary for thelast 10 months. This is also a form of liabilities that the government iscarrying. These also should be cleared.

All told, including other stakeholders, theliabilities, including the institutional, not only in the treasury but also atthe departmental level, will be closer to Rs 7,500 crore.

The macro economic impact of clearing all the pastliabilities will be huge as it is simply pushing money into the system. Theunderlying principle of such a policy being that distributional policies willbe more impactful in the short run than production oriented policies. A phasedmix of the two is ideal; start with the former and bring in the latter in threemonths’ time.

Administratively, this defraying of liabilitiesshould not be left to a face a departmental rigmarole. A taskforce should beset up under the finance department to clear all pending liabilities of theerstwhile state government within the next 30 days.

Second, convert the existing MGNREGA allocation ofabout Rs 1,500 crores into a quasi-universal basic income cash transfer tothose who has availed of it in the peak season last year. In fact, as wassuggested in the Budget of 2018-19, a start should be made combine all thedifferent types of social security payments to create a corpus of about Rs4,000 crore to be used for cash transfer kind of a Universal Basic Income forthe BPL families.

Third, substantially increase the inter seallocation of three sectors viz; health, social welfare and InformationTechnology by carving out some monies from the capital allocations of sectorslike Public Works and Housing and Urban Development. The total capex for Healthdepartment is Rs 1,268 crore; less than half of the public works budget! Itwill not hurt the people much if roads are not macadamised or a few areasremain unconnected for another year. Right now the health budget should bedoubled which is what might save the society from ruination.

There should be a special allocation forstrengthening the online education facility. This is long overdue. The Rs 1,000crore 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 societywhich needs to push online learning in a big way, it is Kashmir valley. Thismay also act as a big push to get the Union Government to relent on allowing 4Gconnectivity!

The Budget has estimated that there are Rs 14,885crore 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 improbablethat the remaining Rs 14,000 crore would have been spend.

It is a fact that from August, 2019 to January2019, the state, in particular the valley, was under a complete lockdown. Therewas no developmental work taking place. Even if these monies were to bere-appropriated for the next fiscal, the pandemic will make it very difficultto ramp up any capital works till the end of second quarter. After which winterwill 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 afunding perspective; as in it is not untied money. It is earmarked to aparticular scheme. But in the given situation that classificatory issue can beresolved with the Union Finance Ministry.

This will also mean diverting money from capitalaccount to the revenue account but in times of a grave crisis like this one itis not, nor should it be seen as, a negative in fiscal management.

Budgetary allocations across functionalclassifications drive economic activity in the overall economic context whichis why there are cyclical and contra-cyclical fiscal policies. Given that theabsorptive capacity of the J&K economy is low, a capex spending will takefar more time to fructify and work its way into the economic system. By then itmight be too late.

Fourth, the UT administration should approach theReserve Bank of India to increase the limit of Ways and Means Advancesfacility. The administration must secure its own lines of credit before seekingto 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 helpextinguish the existing and recurring liabilities of the private sector.

The liabilities of businesses across the board inJ&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 statutorypayments, which include both direct as well as indirect taxes. Ideally, for theperiod August 2019 to March 2020, on grounds of natural justice, the indirecttaxes should be waived off. This will cost the Government of India Rs 6,894crore. For the next fiscal, i.e 2020-21, whatever is done nationally forindirect taxes under the expected stimulus package would automatically applyhere as well. It might, however, be good idea, to provide tax credits inJ&K for the year 2020-21 with a three year time frame.

Over the last five years J&K contributed Rs8,084 crore by way of direct taxes. It had of course received back much more asits state share in these taxes. Leaving income tax untouched, the UTadministration should seek an exemption of one year from the levy of corporatetax in J&K.  As it is there is a tax holiday as a part of theindustrial policy package. This amount will be less than a couple of hundredcrores this year.

There are no reasonable grounds for an income taxrebate than what has been provided nationally as it is mostly on account ofsalaries in J&K. And that too a large proportion is government servants whoare not facing any distress or disruption in their incomes. The total tab onaccount of statutory payment relief will be will not be more than Rs 7,500crore.

Next in line are the regulatory payments whichinclude bank interest on borrowings and user charges on services provided bythe government. For J&K, the RBI package is a non sequitur. It is designedto help the cash flow management of a businesses, in particular corporatizedbusinesses. The problem is that J&K has micro and mini enterprises and notcorporate entities. Also, in Kashmir there has been virtually no cash flowgeneration over the last 8 months or so! The cash credit limits of businesseswith their banks will bear testimony to this. They must all be exhausted if notbeing overdrawn.

In the RBI package, not only will interest continueto accrue during the moratorium period, it will only increase repaymentmaturity by 3 months. Past experience suggest that deferring the debt servicingover the tenor of the loan in an uncertain business environment like inJ&K, causes further distress. Repayments get bunched without any pick up inbusiness. Also, the RBI package is discretionary; it is not mandatory. Bankwill allow moratorium to operate on a case by case basis depending on how the cashflows of an account have been impaired by the Covid-19 crisis.

The principle to be followed with respect tointerest 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 hasto be a haircut on the loans taken by business in Kashmir. Given the reasonsfor the shutdown, it is only fair that it must be borne by the Uniongovernment. However, the RBI and the commercial bank can be called to chip in.

The way to do this is to break up the rate ofinterest (and consequently the interest outgo of business) into three parts:the bank’s contracted cost of funds, the regulatory and prudential cost and themark up. The government must bear contracted cost of fund component. The RBImust allow the bank a regulatory forbearance for the regulatory cost of capitaland on its part the bank must forgo its mark-up.

This will circumvent the moral hazard problem whichaccompanies debt waiver or write off and also ensure that the distress is notshifted 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, theUT administration needs to take steps to stimulate economic activity. A stimuluspackage needs to focus on the specific banking assistance.

The focus of proactive banking at this stage oughtto be on releasing working capital lines which have got jammed. Ideally, inview of the financial squeeze, interest on all working capital loans of Rs 25lakhs and less, should be suspended. But that will require approval of the RBIwhich is unlikely to happen because of the implications elsewhere in thecountry.

However, a two-fold strategy that will not requirethe 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 bedone by increasing the drawing power by 25 per cent, and also removing themargin of 25 per cent.  Second, the UT administration should do aninterest subvention of 300 basis points (3 per cent) on working capital andworking capital term loans of up to Rs 1 crore for as long as the Covid-19crackdown lasts.

For the trade intensive economy, during periods ofdownturn what locks up liquidity is the inventory build-up; be in the shops orstores. To stimulate economic activity, the government should introduceinventory financing in the financial institutions that it has a majority stakein. Besides J&K Bank, it will be good idea to do it through the dormant anddistressed State Finance Corporation, the inactive Development FinanceCorporation and the Regional Rural Banks. Warehouse receipt financing will givea huge fillip to horticulture and the crafts sectors.

The UT administration should convene an SLBCmeeting and get the banks, with J&K Bank in the lead, to draw out a planfor financing receivables of businesses and facilitate factoring. They mustaggressively pursue rent, receivable and bill discounting. Any business thathas an authenticated receivable from a credible and creditworthy partner shouldbe discounted. This will ease the liquidity position of the small and mediumenterprises.

At the same time, the SLBC should resolve that toensure even smaller businesses get their payment from their customers. Tofacilitate factoring , all banks should be asked to  get hooked on to theTrade Receivables Electronic Discounting System, a factoring platform in whichsmall business list their invoices and participating banks take over bill collectionand pay the small business upfront

To help small businesses retain their employmentlevels, operational and obligatory payments, which are the variable costs of abusiness enterprises like salary and input costs should be financed, notfunded. This can be done by creating an overdraft facility earmarked to ensurethat the wage bill of enterprises is financed. The end use for this must bemonitored. Incentivize retention of employees by linking over-draft to the sizeof the average salary of the last 1 year. The same principle should be adoptedfor inputs including power and raw materials.

….a thought in lieu of a conclusion

Even though financing sources have been identifiedalong with the proposals made here, the question which will be asked, legitimatelyso, is where will the money come from?! Before committing to spend, even if onsurvival, it is important to find resources for it.

The UT Budget for 2020-21 has earmarked Rs 4,500crore as “grant for allowances”. Presumably, this is the allocation forallowances for erstwhile state government, now the UT employees, to bring themat par with the central government employees. This can surely wait.

At the very least, these allowances can beimpounded for three years and money used for rebuilding. When the economyrecovers, the taxes become buoyant, the employees can claim their allowances.

However, the employees giving up these allowancesto be used for the revival and reconstruction of J&K will be a decision inenlightened self-interest for a variety of reasons.  It will change thenarrative for ever.

Enroute to a level where we, as a society, takeresponsibility for ourselves and collectively resolve our problems, this couldbe the first step; besides staying home, of course! The symbolism of thisgesture will yield dividends that go beyond the realm of business into therealm of society and social behaviour. Something good can come out of thisparoxysm of alarm, anxiety and grief; it will make us realise the positivecharacter of our own civil society. And restore our confidence in ourselves.Eventually, it may even trigger a new self-critical politics of nation buildingin 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

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