A Covid tax on companies doing well is an option but India must be prepared for the worst

Prof Arun Kumar, Malcolm Adiseshiah Chair Professor at the Institute of Social Sciences and author of ‘Indian Economy’s Greatest Crisis: Impact of the Coronavirus and the Road Ahead’ spoke to Nalini Ranjan Mohanty on the health of the Indian economy. Excerpts from the interview:

We had a discussion almost 6 months ago about the state of our economy. Since then, things have changed, possibly for the worse. The covid second wave seems to have put the Indian economy in reverse gear again. What is your assessment of the damage?

Comparing the first quarter of 2020 to that of this year, April 2021, was better than April 2020 since a national lockdown was not declared; the month of May would be more or less similar to last year, but the month of June this year will most likely be worse than that of June 2020. Further, the danger of a third wave is looming large. So, instead of the expected sharp growth in the economy by 24-25% the rise would be hardly 5-7%. Going forward, given the fear of further waves and the slow pace of vaccination, growth in Q2 and Q3 of 2021 will be negative. Hence, the expectation that the economy would bounce back by around 10% is not going to materialize. Most likely it would be zero or negative for 2021-22 depending on what happens in Q4. So, very likely the loss to the economy would be about Rs.20 lakh crore.

Do you think Government is accepting the severity of the problem or is it still in denial?

The government is still hopeful that the impact will not be large, but they need to wake up. First, the pandemic has spread to rural areas, but the data coming from there is patchy and moreover vaccination is very slow. Secondly, the consumer sentiment has declined drastically. Many middle class families have had to bear heavy medical expenses and faced loss of friends and family. The poor have had to borrow to cover medical expenses. With the third wave speculated to affect unvaccinated children, people would want to save whatever they have. All this will impact consumer demand in coming period. As a result, capacity utilization will remain low and the business sentiment which is already down will remain low. That is why the economic growth rate is not only uncertain but most likely will be negative in the second and third quarters. If the third COVID-19 wave does hit the Indian shores as expected, then not only the third quarter this financial year might do even worse, even the fourth quarter will show negative growth. Consequently, for the year as a whole there may be negative growth.

Our government data is not robust. There is a lurking feeling among a section of people that our economy is hurtling down the path of bankruptcy; that the banks may run out of money, that the Government of India itself may go bankrupt and we would enter a state of financial emergency. How would you react? What should the government do to pre-empt such a possible situation?

The official data on growth is based largely on the organized sector data and it is assumed that the unorganized sector is growing at the same rate as the former. This is incorrect. Since 2017 when demonetization was ordered the organized sector has been growing at the expense of the unorganized sector. So, the former has been growing while the latter has been on the decline and we do not capture the latter. So our growth data is incorrect.

If our economy this year remains at par with the economy in 2020-21 or performs worse, then certainly the future seems very grim. The unorganized sector producers work with very little capital and cannot revive easily after a prolonged closure. This sector employs 94% of the workforce and most of them do not have the capacity to buy food for more than a week. The GoI has come up short in tackling this situation.

The measures taken by the government are mostly on the supply side, that is, giving concessions to businesses. This strategy will not work if the consumer demand remains low. Last year too, the government did not put enough money in the hands of the poor which could have boosted demand. In America they have raised the fiscal deficit by 15 percent. They have already given a package of $4.8 trillion and now the talk is of providing a stimulus of $6 trillion. We cannot match these numbers in absolute terms since our economy is much smaller but in per cent (of GDP) terms we could certainly have done more, to support the poor.

According to the RBI data, consumer sentiment in India even in January 2021, when the economy had supposedly revived, was at 55 points, in the same month in the previous year it was at 105 points. Capacity utilisation was down to 63 percent. So, even the organized sector had not fully revived and was down at least 10% compared to January 2020. In April and May 2021, these numbers would have declined further. The decline now coming on top of the decline in 2020 is likely to see many business failures.

So, a threat of growing NPAs exists and the RBI has been flagging this. That said, the Government of India would not go bankrupt as it spends more to support the poor since it can borrow from various sources, like banks and the well-off sections and finally from the RBI. Many other countries have a much higher debt to GDP ratio than India has at present.

The latest CMIE data tell us that 94 per cent of Indians suffered loss of income during the pandemic; that even the middle class faced widespread job losses. What can be done to alleviate their suffering?

The middle class have some saving; so they can dip into it and survive until the economy revives. But people in unorganized sector which accounts for 94% of the workforce needs immediate help. GoI should provide these people, who are at the bottom of the ladder, food, energy, and cash to buy the essentials. In the rural areas, the agriculture sector needs help as it has been hit due to the transportation problem. Army trucks and school buses can be used to ensure that farmers’ produce reaches the consumers. Last year, only 50% of fruits and vegetables was arriving at Azadpur Mandi. So, the farmers were not getting price for their produce while in urban areas prices shot up due to the shortage; so both rural and urban India suffered. That must be attended to.

GoI also needs to help generate employment, both urban and rural. The MGNREGS allocation should be increased to Rs.3 lakh crores so that people can be given 200 days of guaranteed work instead of the 50 days that they have been getting. An urban employment guarantee scheme needs to be started; it can be used to cater to health and education sectors. The economy would have to be revived by a bottom-up approach from the demand side, not the top-down supply side approach.

The measure you are suggesting would require a lot of money; where would it come from? Should the government decide to print money or should it tax the super-rich or do both?

There has to be more borrowing. There is excess liquidity with the banks; they can lend money to the government. People who have seen a rapid increase in their wealth in stock markets can be made to invest in COVID Bonds. The companies which are making comparatively much higher profits since last year can be levied a higher corporation tax by creating a higher tax slab. The balance would have to be borrowed from the RBI. The fiscal deficit would be much higher but that should not be an issue at present because once the economy revives tax collections would rise.

What do you think about the idea of wealth tax, which even the US, the capitalist heartland, is mooting today?

It is a good idea in general but not ideal at present when the income is stagnant or plummeting for many businesses as well. At the moment a COVID tax maybe levied on those companies or sectors which are doing very well during the pandemic, such as, telecom, IT and e-commerce, or even HNIs who have earned big in the stock market.

The stock market is at an all-time high when the economy is at a historic low; why is the financial market so out of sync with the real economy?

The reasons are both international and national. Central banks all over have released massive liquidity which is looking for returns. Technology companies are doing well and they have surplus liquidity to invest. For instance, Reliance was in huge debt in early 2020 but it has become a zero debt company soon after. To take advantage of the Jio platform, the US technology companies invested heavily in it and then there was the rights issues. Money came into the stock market from foreign institutional investors and when they slackened, from the domestic institutional investors. Many Indians are also joining the stock market as the rate of bank fixed deposit has gone down. One must note that the RBI has warned that this disjunction between the state of the economy and that of the stock market is not good and is creating an instability.

The government is saying that the massive foreign investment in the Indian stock market and our bulging foreign exchange reserve are a pointer to the fact that our current economic setback is only a temporary glitch. Do you agree?

It is true that reserves have increased and that helps with imports and Balance of Payments. Further, as I said, Reliance has turned around its fortune, large tech companies are doing well as are e-commerce, Pharma, FMCG and some other companies. But it is still a bubble because foreign investment is going into only very specific sectors and it would not be enough to boost the economy unless demand rises. Even if we get $50-60 billion in investment from abroad, that is only 7 percent of the total investment in the Indian economy; that is not going to help us overcome the decline in the rest of the economy. The domestic investment in the Indian economy declined by more than 15 percent of GDP (compared to the peak in 2012-13). We have to boost Indian investment by first increasing demand.

Another view is that the rural economy did well even during the pandemic year. As per the government claim, agriculture grew by 3 per cent in 2020-21, when the previous year’s base was reasonably high. Pro-government economists claim that the rural economy would take care of possibly 50% of India’s annual income and 50 percent of the employment opportunity. That should rescue Indian economy from a hard landing. How do you react to it?

The data related to agriculture are at a variance with the government’s claim. During lockdown, agricultural produce did not reach the market, demand for poultry has gone down due to fear of COVID, sweet shops remained closed and weddings were not happening so dairy sector was also hit. The demand for eggs had come down as schools had closed so mid-day meals stopped and they consume 1 crore eggs a day. All these sectors constitute 50% of agriculture. Thus, agriculture also declined in Q1 of 2020-21. So, farmers have been complaining of loss of incomes. This year too I do not see the situation of agriculture being much better. If 94% of the workforce loses incomes due to the pandemic, demand for agriculture produce will be down and incomes of farmers will be hit.

So, agriculture sector which is only 14% of the economy cannot be the source of optimism. The rural non-agriculture economy has been hit by the wave of infections impacting the rural areas. In brief, the longer the second wave sustains and we are still registering upward of 1 lakh cases a day, the more uncertain it would be for the economy and if the third wave hits then there will be overall decline in economy including in agriculture. So, we have to be prepared to plan to face the worst situation possible.

One thing the government of India has done right and one area where it has gone horribly wrong?

Government should have started planning for the vaccination because lockdown does not cure the disease. For that you need vaccines and medicine but there is no medicine at present. Government should have ordered enough vaccine doses in advance. Advanced countries booked doses starting July 2020. Serum Institute said they can manufacture one billion doses; we could have ordered 500 million doses. In January 2021 we should have started with 10 crore vaccination per month so that by the end of the year 60-70 percent could have been vaccinated. Instead, we started with 1 crore people in one and a half month. At that rate it would take 22 years to vaccinate all. Things have gone horribly wrong because we became complacent when the first wave declined after mid-September 2020. It is lucky that we have a big pharma sector which can quickly produce vaccines and medicines. Now we need to ramp up this capacity and vaccinate rapidly. Unfortunately, that will take time so in the meanwhile lockdown remains the only way to slow the spread of the disease.

All in all India and especially the poor are faced with tough times.