The Centre may need to borrow 2-2.5 per cent of GDP or about Rs 4-5 lakh crore additionally for supporting people and businesses hit hard by the coronavirus outbreak and nationwide lockdown, according to former finance secretary Subhash Chandra Garg.
"It seems necessary and advisable that the Government of India borrow this directly from the RBI instead of borrowing from the market. The FRBM (Fiscal Responsibility and Budget Management) Act should be amended to enable this," he said.
For the current fiscal, the government plans to borrow Rs 7.8 lakh crore from the market and contain fiscal deficit at 3.5 per cent of the GDP. Of this, the government decided to borrow Rs 4.88 lakh crore during the first half itself.
Observing that the unconventional solutions are needed for the unprecedented times, Garg said, the government should make a departure from the past to help the businesses, especially the small and own-account businesses that are likely to fold up if not helped with grant support.
"The government should support the small and self-employed businesses by an estimated amount of Rs 2 lakh crore. If the phasing out of the lockdown continues to make some of these businesses inoperative, the fiscal package should build in an additional provision to cover that up as well," he said in a blog.
He also suggested that the economic lockdown should be phased out by lifting it up from the vast rural areas and the cities which have no incidence of COVID-19 spread to undertake all economic activities regulating their interactions with outsiders under a safe protocol and subject to taking up certain additional precautions to eliminate the risk of spread.
Several low-risk industries like mining, construction, manufacturing, etc should also be opened up with these precautions, he said, adding, hot spots and other areas can be opened up only when there is no more incidence of COVID-19.
Services industries would require to readjust their business models to eliminate the risk of passive transmission, Garg, who is currently adviser to Andhra Pradesh Chief Minister YS Jagan Mohan Reddy, said.
With regard to fiscal support to the poor and vulnerable section of the society, Garg said, the fiscal relief package of (Rs 1.7 lakh crore but actually a lot less) announced on March 26 does not address the loss being suffered by these workers. A new fiscal support package of about a Rs 60,000 crore for these workers suffering on account of economic lockdown is most urgently needed."
At least 10 crore workers of the mining, construction, manufacturing and services sectors have been rendered jobless on account of economic lockdown ordered to contain the COVID-19 spread risk and they need an immediate fiscal support of Rs 2000 per month for three months, he added.
Barring farm sector, essential goods and services and e-commerce businesses where it was feasible to work from home, the rest of the economy is totally shut, he said, adding, 21-day of shutdown of approximately 70 per cent of the economy would cause about Rs 8 lakh crore of loss of value addition/ GDP to businesses.
Besides, he said, the Centre should release the held-up amount of approximately Rs 30,000 crore of GST compensation as revenue of states have suffered massively.
"The Government of India should also release the instalment of Rs 56,000 crore of the states' share in central taxes on due date i.e. 15th April. The states should be provided additional borrowing limits to cover up the shortfall in their tax revenues for the year 2020-21," he said.
With regards to liquidity in the system, he said. banks have been provided considerable liquidity by the RBI of about Rs 5 lakh crore.
"The banks are, however, unlikely to lend these funds to businesses, except to some high investment grade credits. The banks might actually use this liquidity to invest in Government of India and state government's bonds if the Government of India chooses not to borrow directly from the RBI," he said.
It is time the RBI starts assuming some risk and buying corporate bonds and the mortgage backed assets in India, he said, adding, this will help credit flow to the businesses.