May 26, 2020

INDIA: Lives vs. livelihood debate rages as country limps back to work

BY Aditi Phadnis

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( 4 mins)

Despite a sharp spike in Covid-19 positive cases (numbering 148,000 on Tuesday 26 May, increasing at more than 6,000 a day), the Narendra Modi-led National Democratic Alliance (NDA) government has opted for a gradual opening up, combined with the hefty package of fiscal and other measures to help entrepreneurs kick-start their business announced on 12 May.

Modi pledged to spend almost 10% of India’s fiscal-year 2020 gross domestic product – INR 20trn (USD 256bn) – on economic relief measures toward building a “self-reliant India.” But the fine print revealed that of this, nearly INR 1.7tn (USD 109bn, around 43% of the total) in both fiscal and monetary stimulus had already been announced on 27 March.

An INR 700bn (USD 55bn) spending scheme specifically meant to revive mini, small and medium enterprises (MSMEs) was the largest chunk of this package (73%), comprising collateral-free automatic loans for MSMEs worth INR 3tn (USD 40bn), aimed at 4.5mn small businesses with loans outstanding of at least USD 3mn. According to the scheme, the government will provide, until end-October, loans that are fully guaranteed by the government for a tenure of four years with a twelve-month moratorium on principal payment. The calculation was that once small businesses restart, the politically devastating optics of hundreds of thousands of low-income migrants returning home on foot because the closure of MSMEs would correct itself.

The evidence suggests the homeward march of migrant labor might be slowing down. Unemployment figures are holding at around 24% (up from 6% at the same time in 2019). But the strategy is predicated on two factors: one, that the infection will be contained and will eventually taper off to manageable limits, and that MSMEs will bounce back to life.

Both assumptions could go badly wrong. There is no sign of the infection abating, let alone becoming manageable. While the government is repeating that things could have been much worse if there had been a delay in imposing a lockdown,
the fact is that it is under pressure to open up the economy which in turn runs the danger of spreading the infection, despite elaborately designed Standard Operating Procedures (SOPs). For instance, a mobile assembly unit in a Delhi suburb had to close a day after it had opened when six workers were found to be Covid-19 positive.

Nor is it clear that MSMEs – who have proved poor borrowers in the past – will recover to the point where they can pay their loans, both current and past, or if they will leave state-owned banks and taxpayers saddled with even larger bad loans than before.

The opposition is hammering home the point that what is needed is demand-side adjustments – which fundamentally involves putting cash in people’s hands so that consumption continues. But fear of the infection is having a paralyzing effect, at least for the time being. After extensive negotiations and with government-mandated fares, the federal government ordered airlines to start operating. Despite agreeing to take a hit, however, many air carriers had to scrap flights even to major Indian cities because there were not enough passengers to warrant operations. Most states ruled by the opposition have made it clear that they do not want transport to their states unless they can run it themselves – for fear of ‘importing’ the infection.

A meeting of 22 small and big opposition parties last week convened by the principal opposition Congress party saw some groups stay away. Despite hiccups in managing the pandemic, the credibility of the Modi government continues to be high.

With no political tests until the end of the year (elections to the state assembly of Bihar are scheduled in November), the government still has time to reassert control.

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