Indian Economy Review | March 2020

Corona response; impact on the economy

What appeared very distant just two months ago became a danger signal next door within a few weeks and has now engulfed the whole nation as a full-blown crisis with an unprecedented impact on the country’s health and economy. On January 30, the first Coronavirus case was confirmed in India. By early March, it became a global pandemic and the Indian government advised caution to all its citizens, even though the spread was limited. In the second week of March, the government decided to close its international borders and by the third week of the month, a national lockdown was enforced.

In India, the number of confirmed cases of COVID-19 has just entered the four-digit level, with the casualties estimated at 30, but the global number of those afflicted by it has crossed 735,000 and the deaths are now close to 35,000. Kerala had initially led the chart of confirmed cases in the early days, but it is now Maharashtra, followed by Kerala, Karnataka, Uttar Pradesh, Rajasthan, Telangana, Gujarat, Delhi, Punjab and Tamil Nadu. No clear pattern emerges, but states with cities and towns with large exposure to international travel through business and tourism have taken the biggest hit. The trend of the spread of the flu in the world has also maintained an unusual trajectory. The hotspot was initially Wuhan in China, but within weeks, it became Italy and now the United States leads the table of countries with the largest number of confirmed cases of COVID-19, but Spain is not very far behind Italy in the number of casualties.


 India response prompt; focus needed on testing & healthcare

The Indian government’s response to the COVID-19 spread has been relatively prompt. Once its experts recognized the threat of the disease, the government followed the path of enforcing social distancing among the people, initially through a voluntary initiative and later by an order for a national lockdown. However, the absence of a simultaneous stress on ramping up the country’s capacity to conduct tests on people suspected of having contracted the virus was deeply troubling. Equally problematic was the lack of a concerted drive to push for an increase in the country’s healthcare infrastructure capacity, particularly the availability of intensive care units with ventilator facilities – a lesson that was too obvious not to have been learnt from the experience of the US and Italy. And the Chinese example of building two new hospitals with a capacity of over 2,000 beds in ten days was ignored. The testing pace has improved from the third week of March, many companies are getting into the business of producing ventilators and a few hospitals are creating special wards to cater to coronavirus patients. Hopefully, the additional capacity will be adequate to meet the demands if the virus spreads more rapidly.


Four packages, but more needed for the poor and migrant workers

The government’s response to the economic fall-out of the flu was evident in four phases. The first instalment came with Finance Minister Nirmala Sitharaman announcing a relaxation in the deadlines for compliance of various legal formalities and procedures by companies and individuals. These relaxations were timely and welcome. The second round of the announcement came along with the prime minister’s announcement of the national lockdown for 21 days. An amount of Rs 15,000 crore was allocated to improve the availability of medical protection kits to tackle the virus. The third phase came in the form of an economic relief package of about Rs 1.7 lakh crore, which included cash transfer to the poor, farmers and women, in addition to making available food items to the underprivileged sections of society. And the fourth package was what the Reserve Bank of India announced on March 27.

Analysts have commented that the  outgo on account of the government’s measures would be less than Rs 1.7 lakh crore since some of them would not result in any additional financial expenditure like the provision of food grain. Even the increase in the average basic wages under the Mahatma Gandhi National Rural Employment Guarantee Programme had already been budgeted for and would not result in an extra expenditure. Nevertheless, the economic relief package should help the poor and unorganised workers, though questions will remain why these measures were not announced along with the lockdown and whether the poor migrant workers could have been shifted back to their homes and villages before the lockdown enforcement. And given the huge rush of unorganised workers striving to get back to their villages, it does appear that the economic relief package for the poor should have been announced a little earlier and in more generous doses.

The Reserve Bank of India came out with a timely monetary policy intervention to address the concerns over the impact of the virus on the economy. It slashed the repo rate (at which banks can borrow from the central bank) to a record low level of 4.4 per cent and took other measures that amounted to over Rs 3.7 lakh crore by way of additional liquidity. The cash reserve ratio was cut and equated monthly instalment payments against loans were suspended for three months.

But the impact of COVID-19 would be hugely disruptive, bringing down growth and shutting businesses leading to job losses. To what extent growth will be impacted, only time will tell. But there is little doubt that the coronavirus attack will have engineered a significant shift in the way businesses conduct themselves with consequences that are yet to be fully visualized. 


Budget passage expedited with welcome changes

The passing of the Union Budget for 2020-21 was expedited, to a great extent, by the COVID-19 outbreak. On March 23, a little ahead of its schedule, the Budget received the assent of both the houses of Parliament and immediately, thereafter, they were adjourned sine die, in the wake of the COVID-19 outbreak. Less than 36 hours later, the nation was locked down to prevent the spread of the flu. The passing of the Budget was significant because the finance minister rolled out a few additional initiatives that should help the government face up to the challenging times in the coming months. There were as many as 40 changes incorporated in the Budget, most of them procedural in nature. But the ones that made substantive changes in the incidence of taxation are worth recalling here.


Govt arms itself to raise duty on petro products

Recognising that the government had reached the ceiling of the additional excise duty that it could impose on petrol and diesel, the Budget equipped the government to raise the ceiling of such additional excise duty on petroleum products. The earlier ceiling of Rs 10 per litre on petrol and Rs 4 per litre on diesel had already been reached. The Budget raised the ceiling to Rs 18 a litre for petrol and to Rs 12 a litre for diesel by amending the Eighth Schedule of the Finance Bill. In other words, the government could now rejig the additional excise duty if the need arose to mobilise some more revenues from the oil sector.


More tax on non-resident e-commerce outfits

Additionally, the Budget imposed a 2 per cent digital tax on trade and services of non-resident e-commerce operators. This was an extension of the equalization levy already being imposed on resident e-commerce players. The new levy, to be effective from April 1, will impact the Chinese e-commerce players like AliExpress, Shein and Club Factory, which sell in India but without an establishment within the country.


NRI taxation gets clarity

The provisions for taxation of a non-resident Indian’s (NRI) income have also been relaxed. The amendment now has made it clear that only those Indian citizens will be taxed, who have stayed in India for a period of 120 days or more (instead of 180 days earlier) and have a total income (other than income from foreign sources) exceeding Rs 15 lakh during the previous year. Experts may quibble over the threshold of Rs 15 lakh as being on the lower side, but the clarity provided through the Budget amendment will be welcome.


Tighter laws on bank withdrawals by defaulters 

As significant as the measure on NRIS has been the amendment to tighten rules against tax evasion by introducing a higher tax deduction at source (TDS) for all bank withdrawals by income-tax defaulters, who fail to file their returns for all of the three preceding years. The TDS rate for bank withdrawal for such defaulters would be 2 per cent if the withdrawal amount is between Rs 20 lakh and Rs 1 crore and 5 per cent for withdrawals of over Rs 1 crore. In the normal course, TDS on cash withdrawals of over Rs 1 crore is 2 per cent.


Reduced tax collected at source for remittances abroad 

Finally, one of the Budget amendments reduced the rate of tax collected at source from the earlier 5 per cent to 0.5 per cent on all remittances made abroad for overseas education. This would be a huge relief and reduce the temporary tax burden on an individual, as eventually all such taxes collected at source can be adjusted against the tax dues at the time of filing returns.


Budget assumptions come under scrutiny

What these amendments to the tax provisions, however, failed to address were the rising concerns over the Budget’s assumptions of economic growth and revenue collections in the wake of the COVID-19 outbreak. The country-wide lockdown will have affected growth from March onwards and the stock markets have nosedived already by over 30 per cent in the last one month.

If the 5 per cent real growth projection for 2019-20 were to be achieved, the January-March 2020 quarter should have seen a growth rate of 4.7 per cent. However, that looks unlikely. Thus, the 5 per cent real growth target for 2019-20 may not be realized. This will also have an adverse impact on gross tax revenue collections in March, which had to be over Rs 4 lakh crore, if the annual target of Rs 21.6 lakh crore were to be achieved for 2019-20. This target too looks unrealizable in the current situation. The disinvestment target of Rs 65,000 crore too will not be achieved. There will be some savings in expenditure, but on the whole achieving the fiscal deficit target of 3.8 per cent of gross domestic product (GDP) will be a tough task unless the government dips further into the National Small Savings Fund (NSSF) or postpones some of its expenditure.

The Budget’s revenue projections for 2020-21 will also take a hit, as the nominal growth projections of 10 per cent (compared to 7.75 per cent in 2019-20) will look too ambitious under the current circumstances. Achieving a 12 per cent growth rate in gross tax collections would be a tough task, a 223 per cent rise in disinvestment revenues at Rs 2.1 lakh crore will be a difficult target and the fiscal deficit projection of 3.5 per cent of GDP may become a casualty. There will be some savings on account of lower expenditure on subsidies, thanks to the drop in crude oil prices, but these would be offset by the need for providing a fiscal stimulus measure to counter the adverse effects of COVID-19 on the economy. There is little option for the government other than taking a fresh look at its Budget numbers to make the task of chasing them more realistic.


Oil price drops, but no cheer with fall in demand 

A development that under normal circumstances would have been a big bonanza for the Indian economy has ironically failed to cheer the government’s policy makers or the markets. The international crude oil prices have dropped by almost half, but its impact has been minimal for sectors that use this imported fuel because of the COVID-19 outbreak. The aviation sector, which would have celebrated the fall in oil prices, can’t take full advantage of the situation as it cannot even fly its aircraft and how soon they can resume flights is unclear.

The government took advantage of the oil price drop by raising excise duty on petrol and diesel on March 14 that in a full year would fetch an additional revenue of Rs 39,000 crore. But with an expected drop in fuel sales of about 10 per cent, the additional revenues may not materialise. Indeed, the 8 per cent growth in excise collections on petroleum products, projected in the Budget, may itself be a difficult target to achieve. In short, the demand destruction that is taking place in the wake of COVID-19 has neutralized the oil price drop benefits that would have otherwise accrued to the economy.



 (The views expressed are personal)



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About the Author

A K Bhattacharya
Distinguished Fellow, Ananta Centre
Editorial Director, Business Standard

After a 10-year long stint with Financial Express from 1978-1988, in different capacities in the areas of news gathering and news management, A.K. Bhattacharya joined The Economic Times in 1988 and functioned as its Chief of Bureau from 1990 to 1993. In 1994, he became its Associate Editor. He joined The Pioneer as Executive Editor in September 1994, stabilised the newspaper before becoming its Editor in 1995. He joined Business Standard in 1996 as Editor, News Services. Was its Resident Editor in Mumbai from July 1996 to September 1997 and helped the newspaper launch its Mumbai edition. From October 1997 to May 1998, he functioned as National Editor leading the paper's news operations. As Managing Editor of Business Standard between June 1998 and April 2000 and as its Group Managing Editor between May 2000 and October 2011, he oversaw the newspaper's news operations and editorial administration. From November 2011 to July 2016, he was the Editor of Business Standard. Since August 2016, he has been the Editorial Director of Business Standard on a part-time basis. He has been writing a regular column - New Delhi Diary - commenting on government affairs, since 1990 - that appeared in The Economic Times, Pioneer and now in Business Standard. Since 1997, he has been writing another column - Raisina Hill - commenting on developments/issues concerning bureaucracy.