Prime Minister Narendra Modi’s 8pm speech on 12 May 2020 was very important for many reasons. One, India and its citizens were looking for a clear strategy from him with regard to dealing with the economic impact of the COVID-19 crisis. Two, Indians were also anxious that after the 27th March stimulus of Rs1.70 lakh crore and various moves, including two reverse repo rate cuts announced by the Reserve Bank of India (RBI), further stimulus had not been forthcoming despite the ongoing lockdowns, which has literally seen the economy stall. On this backdrop, the Rs20 lakh crore stimulus (about 10% of India’s GDP) announced by the prime minister is very welcome and should give Indians a great sense of relief—indeed, I have previously argued that India’s economic stimulus needs to be at least of the order of 10% of GDP, if not more
That said, the details of this package are awaited and hopefully, as alluded to by the prime minister, the total economic stimulus of Rs20 lakh crore will take care of the urgent and emerging needs of farmers, poor and vulnerable people, the micro, small and medium enterprises (MSMEs) and others and push India into a new era of prosperity and self-reliance.
Even as we wait for the details of the economic package announced by the prime minister, it was also refreshing to hear several themes espoused by him in his speech. He talked of reforms in land, labour, laws and liquidity—clearly, as I have written several times
, radical reforms in these areas are necessary for India in order to take advantage of the likely forthcoming exodus from China.
Likewise, the prime minister spoke at length about supply chain reorganization
and the need to create India focussed supply chains. This again was expected and certainly welcome. It should ensure that we don’t suffer the kind of supply chain disruptions that we faced in January-March 2020 because of the virus and lockdowns in many countries in China and elsewhere. The prime minister’s overall strategy of ‘being vocal about local production” is also clearly a sound one that should help in strengthening Indian manufacturing and promote India’s self-reliance.
But one aspect that India needs to safeguard here is nicely put by a global supply chain expert from the US, “Natural resources are not evenly distributed across the world. Two defenses that would evolve here are: single material diversification (e.g. rare earth metals) through substitute materials and technologies. The other tactical defence would be increased safety stocks of critical materials. Just in time inventories will yield to just in case inventories for these critical materials. For example, the US has a strategic petroleum reserve or stockpile. Other nations like India and China will have to emulate it as current low prices are a great time to build stockpiles for nations, especially, those with deep pockets. While this strategy may not be necessary for all industries, it would be critical to focus on industries that use medical, defence and technology raw materials. Clearly, we are not going to be devastated by cocoa being concentrated in Ghana, but medicines are different. Thus, for critical supply chains, going into the future, national supply chains will be more important relative to today. The state will play a bigger role in future, not just through direct fiscal and monetary policies (e.g. stimulus) but also indirectly through regulations and mandates.”
So, while the Indian prime minister’s call to strengthen local supply chains is indeed very appropriate, it also needs to be accompanied by commensurate measures in building stockpiles of strategic reserves of key raw materials as outlined above. Additionally, the proposed reforms in laws, land, labour and liquidity as suggested by the Prime Minister, should also help ensure the development of sound national supply chains.
The prime minister also talked of rationalisation of taxes and that is really necessary to make India into a vibrant and future driven economy. I really hope that the prime minister ensures the implementation of a variable banking transaction tax
that will replace all direct and indirect taxes. As I have written earlier, the variable banking transaction’s tax (BTT), which will have an average rate of 1% with differential rates for different categories of transactions and businesses etc., is very viable, when one takes into account the data from the RBI payments system for years 2018-19 and 2019-2020.
The BTT reform will also have to be accompanied by additional reforms to mop up black money including reduction of stamp duties and registration charges for property to ½ % and increase of property/land guidelines values so that they correspond with property/land market values. When property guideline values equal market values, the scope for undervaluing the property sale and black transactions gets eliminated. Furthermore, other measures (using 85% carrots and 15% stick) must also be used to retrieve and bring into the banking sphere, the existing black money within India as well as those stored in illegal accounts abroad. This is long overdue and can be of crucial help at this juncture.
Finally, the prime minister rightly stressed on the need for consumption of local products and hopefully, this should help India get over the huge consumption shock that awaits us and build up the necessary demand required to kick start the economy again. Clearly, if well-conceived and implemented, the kind of measures that the prime minister is talking about, should also help us take care of supply side issues as well.
Together, I would expect these to turbo-charge domestic consumption, significantly enhance domestic savings, further reduce interest rates for lending and make our exports truly competitive and ensure that our local brands really become global. The measures recommended by the prime minister should also enhance the overall size of the economy, especially if the parallel (black) economy and informal sector are fully absorbed into the mainstream as I have stressed many times.
And undoubtedly, all of these reforms should cumulatively serve as a impetus, more potent than before, for development, including investment in infrastructure, health, and education and thus help transform India into a truly inclusive yet rapidly growing and vibrant economy.
(Ramesh S Arunachalam is author of 12 critically acclaimed books. His latest release in January 2020 is titled, “Powering India to Double Digit Growth: Five Key Steps To A Robust Economy”. Apart from being an author, Ramesh provides strategic advice on a wide variety of financial sector/economic development issues. He has worked on over 311 assignments with multi-laterals, governments, private sector, banks, NBFCs, regulators, supervisors, MFIs and other stakeholders in 31 countries globally in five continents and 640 districts of India during the last 31 years