Combating Covid-19: The Economic Dimension

Just as the valley of Kashmir was limpingback to normalcy after a near six month lockdown from August 2019 to January2020, it is again under a lockdown from March 21st, 2020. Statistics will bearout 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 worldthat is mentally and socially most equipped to handle the Covid-19 curfew ithas 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 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. Diagnostic Review:

The relevant differentiator from aneconomic point of view is that all the earlier shutdown were localisedlockdowns. The valley was shut; or parts of the valley were shut. This presentone is a national, indeed, a global lockdown. This difference has hugeimplications on how it will impact the economic growth of J&K andlivelihood of its people. Not to speak of lives. As it turns out J&Kcurrently has the highest per capita 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.

While local production as well asconsumption did decline, the external consumption and remittance inflows didnot drop to the same extent. In fact in some cases, the price realisation perunit turned out to be a tad better. The local under-consumption of importsalong with higher external consumption of local products as exportsfortuitously generated the same positive effects on the economy that aclassical import substitution strategy has. This resulted in capping the dwindling profitability thus making theeconomy operate at a low level of equilibrium.

Today the situation is very different. Theexternal markets — national as well as global – are in a lockdown. Even if thegoods and services produced in Kashmir may continue to be produced, the valueof these cannot be realised in the market. Not that production will not beimpaired. It will be. For instance, this is the season for a lot of farmactivity in the horticultural sector; pesticides, pruning and the all like willhave to be done. This will not be done and will have a bearing on the scale ofproduction. The remittance inflows will also dry up. It is all this that willdeepen the low level equilibrium and convert the incipient crisis into astructural crisis in the Kashmir economy.

None of these issues are being or can beaddressed in generic Covid-19 humanitarian relief package for theunderprivileged announced by the Government of India. Even the supplementarymeasures announced by the Reserve Bank of India are by way of liquidity easingand relaxations in the regulatory and prudential norms for the formal businesssegment.

Not only are these measures partial to beable to deal with the massive body blow to the national economy, they are fartoo generic 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 policyresponse, it is important to recognise that the August 5th six month shutdownis making the present day Covid-19 lockdown more crippling. To give an examplein line with the prevailing situation, it is like being Covid-19 infected justafter having had a bad bout of pneumonia! The patient will obviously be evenmore vulnerable. That is the state of the Kashmir economy.

It has to be understood that the economicdistress in J&K is not a corporate balance sheet problem that can beresolved 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 —   arecaught 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 ofthe regular trade cycle of supplier’s credit. This in turn has forced thetrade, especially the wholesalers, to exhaust their working capital lines/ cashcredit lines making the businesses illiquid.

The net result is that businesses haveassets that they can’t sweat because of demand disruptions; they can’t leveragethem because of credit limits having run out. They have inventories that canneither 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 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 economyis driven by services sector more than production sectors. A case in pointbeing the trade, tourism and hospitality sectors. These are not only the worsthit by the Covid-19 pandemic, the recovery of these business will be theslowest. So it is fair to assume that unlike in the rest of the country, therecovery process in J&K will not only be very slow but also tardy andarduous.

Yet, the most fascinating feature of thegrowth dynamic in J&K is the inbuilt virtuous mechanism of incomedistribution. Provided the right composition of growth is engendered – not thekind of industrial 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 thecrisis — a double whammy of lockdown after the shutdown — is a three layeredpackage; a combination of humanitarian aid and relief, rehabilitation andrevival stimulating measures.

The UT administration in J&K has beenquick off the blocks and taken some very practical steps for giving relief tosome sections of the society. The advance release of pension payments and sometype of salaries is welcome. Using the corpus of J&K Building and Other ConstructionWorkers Welfare Board is an excellent idea to give relief to the mostmarginalised. 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 expenditurepolicy to ensure relief, safety, aid and support

a private enterprises stabilisation policy,more in the nature of a stimulus package, which will revive, rehabilitate andstimulate economic activity

Reorienting Public Expenditure:

The public spending priorities outlined inthe 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 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 moneyto defray 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’Coordination Committee, for instance, has gone blue in the face crying aboutthe long overdue government payments. The pending liabilities on account ofcontractor payments alone was over Rs 1,000 crore.

There are a host of public sectorundertakings who have not disbursed paid salaries for many months or madevendor payments for years. For example, the J&K Cements has apparently notpaid salary for the last 10 months. This is also a form of liabilities that thegovernment is carrying. 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 allthe past liabilities will be huge as it is simply pushing money into thesystem. The underlying principle of such a policy being that distributionalpolicies will be more impactful in the short run than production orientedpolicies. A phased mix of the two is ideal; start with the former and bring inthe latter in three months’ time.

Administratively, this defraying ofliabilities should not be left to a face a departmental rigmarole. A taskforceshould be set up under the finance department to clear all pending liabilitiesof the erstwhile state government within the next 30 days.

Second, convert the existing MGNREGAallocation of about Rs 1,500 crores into a quasi-universal basic income cashtransfer 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 allthe different 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 Rs14,885 crore to be spend on the capital account between October, 2019 and March31st, 2020. Setting aside debt repayment of Rs 1,000 crore, it is highlyimprobable that the remaining Rs 14,000 crore would have been spend.

It is a fact that from August, 2019 toJanuary 2019, the state, in particular the valley, was under a completelockdown. There was no developmental work taking place. Even if these monieswere to be re-appropriated for the next fiscal, the pandemic will make it verydifficult to ramp up any capital works till the end of second quarter. Afterwhich winter will act as a natural constraint

So it is not a challenge in terms offinding money. The real challenge will be that the allocations are schemespecific from a funding perspective; as in it is not untied money. It isearmarked to a particular scheme. But in the given situation thatclassificatory issue can be resolved with the Union Finance Ministry.

This will also mean diverting money fromcapital account to the revenue account but in times of a grave crisis like thisone it is 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 shouldapproach the Reserve Bank of India to increase the limit of Ways and MeansAdvances facility. The administration must secure its own lines of creditbefore seeking to help revive the economy and the businesses.

Private Sector Stabilisation Policy:

First, instead of postponing businessliabilities, which is what the RBI’s package does, the UT administration musthelp extinguish the existing and recurring liabilities of the private sector.

The liabilities of businesses across theboard in J&K that need to be specifically addressed in a graded mannerfollowing 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&Kcontributed Rs 8,084 crore by way of direct taxes. It had of course receivedback 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 ofcorporate tax in J&K.  As it is thereis a tax holiday as a part of the industrial policy package. This amount willbe less than a couple of hundred crores this year.

There are no reasonable grounds for anincome tax rebate than what has been provided nationally as it is mostly onaccount of salaries in J&K. And that too a large proportion is governmentservants who are not facing any distress or disruption in their incomes. Thetotal tab on account of statutory payment relief will be will not be more thanRs 7,500 crore.

Next in line are the regulatory paymentswhich include bank interest on borrowings and user charges on services providedby the government. For J&K, the RBI package is a non sequitur. It isdesigned to help the cash flow management of a businesses, in particularcorporatized businesses. The problem is that J&K has micro and minienterprises and not corporate entities. Also, in Kashmir there has beenvirtually no cash flow generation over the last 8 months or so! The cash creditlimits of businesses with their banks will bear testimony to this. They must allbe exhausted if not being overdrawn.

In the RBI package, not only will interestcontinue to accrue during the moratorium period, it will only increaserepayment maturity by 3 months. Past experience suggest that deferring the debtservicing over the tenor of the loan in an uncertain business environment likein J&K, causes further distress. Repayments get bunched without any pick upin business. Also, the RBI package is discretionary; it is not mandatory. Bankwill allow moratorium to operate on a case by case basis depending on how thecash flows of an account have been impaired by the Covid-19 crisis.

The principle to be followed with respectto 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 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 rateof interest (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 hazardproblem which accompanies debt waiver or write off and also ensure that thedistress is not shifted from the business to the bank. As it is the main lenderin the valley, the J&K Bank, is under stress for asset quality.

Having addressed the legacy liabilityissues, the UT administration needs to take steps to stimulate economicactivity. A stimulus package needs to focus on the specific banking assistance.

The focus of proactive banking at thisstage ought to be on releasing working capital lines which have got jammed.Ideally, in view of the financial squeeze, interest on all working capitalloans of Rs 25 lakhs and less, should be suspended. But that will requireapproval of the RBI which is unlikely to happen because of the implicationselsewhere in the country.

However, a two-fold strategy that will notrequire the regulators permission but can be a Board level decision in thebanks. First, is to increase the limit for all standard banking accounts. Thiscan be done by increasing the drawing power by 25 per cent, and also removingthe margin of 25 per cent.  Second, theUT administration should do an interest subvention of 300 basis points (3 percent) on working capital and working capital term loans of up to Rs 1 crore foras long as the Covid-19 crackdown lasts.

For the trade intensive economy, duringperiods of downturn what locks up liquidity is the inventory build-up; be inthe shops or stores. 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 anSLBC meeting and get the banks, with J&K Bank in the lead, to draw out aplan for financing receivables of businesses and facilitate factoring. Theymust aggressively pursue rent, receivable and bill discounting. Any businessthat has an authenticated receivable from a credible and creditworthy partnershould be discounted. This will ease the liquidity position of the small andmedium enterprises.

At the same time, the SLBC should resolvethat 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 ReceivablesElectronic Discounting System, a factoring platform in which small businesslist their invoices and participating banks take over bill collection and paythe small business upfront

To help small businesses retain theiremployment levels, operational and obligatory payments, which are the variablecosts of a business enterprises like salary and input costs should be financed,not funded. This can be done by creating an overdraft facility earmarked toensure that the wage bill of enterprises is financed. The end use for this mustbe monitored. Incentivize retention of employees by linking over-draft to thesize of the average salary of the last 1 year. The same principle should beadopted for inputs including power and raw materials.

….a thought in lieu of a conclusion

Even though financing sources have beenidentified along with the proposals made here, the question which will beasked, legitimately so, is where will the money come from?! Before committingto spend, even if on survival, it is important to find resources for it.

The UT Budget for 2020-21 has earmarked Rs4,500 crore 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 theseallowances to be used for the revival and reconstruction of J&K will be adecision 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

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