Needed tough love not freebies

rural India

Covid-19 has made the Bharat-India divide even sharper. The obsessive, 4G connected, masked and gloved urban Indian checking for updates and worrying about a post-Covid-19 future on the one hand and rural India, carrying on stoically as always, too busy with the daily mechanics of agricultural production to care overly about the “outside” world, except to wonder when their expatriate son, daughter or children will come home.

An urban disaster

The blight has hit urban India harder. 71% of the confirmed cases and 83% of the deaths (till April 28) are from just 30 big cities. This skew could also be because cities serve as the medical emergency hubs for the surrounding rural areas and the worst cases are ambulanced-in for treatment. The consolation is that economic recovery will benefit urban India disproportionately via improved stock valuations, higher rentals and realty values and higher salaries in the formal sector.

Too tough to wilt to infection

The good news is that the disease is abating. The Indian genome has proved too tough to be compromised. Covid-19 found itself battling a bunch of disease hardened “Rambos” in India versus easier pickings in molly-coddled Europe and the United States, where people survive by creating a pharma shield around themselves of vaccines, preventive and post morbidity care.

The “Covid-19 war” control room should now shift from the Health Ministry to the Finance Ministry where keeping our Rambos alive, despite widespread unemployment, business dislocation and ravished savings is no less stupendous a task.

The trio of fiscal measures for post Covid recovery

There are three key fiscal tasks to be accomplished. First, getting cash into the hands of the 100 million families who subsist on work outside the formal sector. Agriculture has had a good rabi crop which helps keep rural incomes buoyant.

Second, since industrial production will take six months to attain full potential and hospitality, aviation and tourism (HAT) services even longer, initiate employment creation projects in the labor basins where at least 25 million migrant labor originate in Rajasthan, UP, Bihar, Madhya Pradesh, Orissa and West Bengal. 

Third, provide bridging loans to businesses which have slipped into indebtedness because of the extended lockdowns.

Emergencies require a rule change

Whilst undertaking these necessary initiatives a trade-off between distributing relief effectively – putting money in the hands of the needy at the earliest and the procedural needs of propriety which often cause delays – witness how long it takes us to buy defence equipment- needs to be navigated. 

Manmohan Singh’s government collapsed under the slurs of scams just six years ago. The hedgehog of corruption continues to haunt politicians and most especially, government servants, who have often ended up holding the wrong end of the stick. 

One way of de-risking good faith decisions taken in emergency mode is to explicitly notify a separate set of guidelines for emergency assistance which emphasize the need for speedy disbursement over procedural safeguards. 

To ensure that the “emergency” does not get exploited as an opportunity for injudicious decisions, such funds must come with enhanced post disbursement monitoring and audit to reduce the leakage of funds.

Financial assistance for cash strapped business

In addition to the cash assistance to individuals there is the urgency to cater to business – the source of sustainable decent employment. The RBI has, through a slew of instruments, ensuring that INR 7 trillion of surplus liquidity is sloshing around. But the money must trickle down to the users of capital via financial intermediaries for it to be useful.

An unorthodox approach

Till now RBI has focused on a hands-off release of more funds – some tagged to specific sectors – in a business-as-usual manner. RBI should also consider an unorthodox approach of authorizing a special class of emergency “bridge” loans which would be quick disbursing but come with strict regulations on use and closely monitored by the regulator.

Neoliberal advocates of light-touch regulation will be horrified at such micromanagement of private loans. Consider however the twin objectives before the RBI –to ensure that “misallocation of capital” is minimized – the most difficult aspect of emergency lending is retaining the speed of disbursement whilst avoiding the pitfalls – and that these loans are paid back as the financial sector stabilizes and substituted by normal financial instruments. 

Both objectives are met by imposing a temporary regime of heavy-handed regulation for those resorting to such emergency loans. 

First, the onerous oversight conditions (use limitations and quarterly forensic audit) will ensure that only those who have a genuine need will apply. 

Second, if the expenditure for which the loan can be used are tightly specified excluding the most egregious splurging hot spots like on-lending to layered quasi subsidiaries; purchase of high-end SUVs, real estate or consumer durables; entertainment and overseas travel; refurbishment of offices and the like, the most dodgy customers will be dissuaded from applying. 

Third, making the oversight intrusive also incentivizes speedy repayment of the loan because companies want to be free of external auditors looking over their shoulders. The cost of such intrusive regulation, for which the RBI would have to hire auditors, should be loaded onto the interest rate charged.

Big public spending on emergency services inevitable

The last three decades have been marked by cynicism about the virtues of “big government”. Prime Minister Modi himself vowed in 2014 to change the administrative architecture of India, replacing more government with more governance. 

Covid-19 and any war-like situation – luckily we have avoided the latter and only been mildly scarred by the former – teach us that there is no alternative to “growing” the funding of public services by government, if we are to be prepared for the next calamity.

Funding more public services is not the same as directly managing them by government. But it does mean transforming the profile of government employment away from generalist secretarial skills to sector specific, professional skills- legal, financial, contract management and program monitoring skills in social protection, health, education and infrastructure. 

Start cutting the flab in government

railway

Much of the flab in government relates to the arcane way in which it works – manual rather than digital, hierarchical rather than horizontal, multiple rather than exclusive mandates at each level of government and the workforce thinly distributed across far too many areas of work. 

Transiting to a leaner architecture will open the fiscal space for greater professionalization, higher effectiveness and better results. For starters, this is how the “fiscal war” room should function in the Ministry of Finance, minus the oily halwa at budget time, that has been its signature tune till now.

Also available at TOI Blogs April 29, 2020 https://timesofindia.indiatimes.com/blogs/opinion-india/needed-tough-love-not-freebies/

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