As a director at the National Institute of Public Finance and Policy, Rathin Roy was one of the members of a committee chaired by NK Singh, which reviewed The Fiscal Responsibility and Budget Management (FRBM) Act. The report of the committee formed the basis to the amendment of the Act two years ago.
In an interview to P Vaidyanathan Iyer, he talks about the priorities, pain points, and fiscal needs of what he calls a “warlike economy”.
Excerpts from the interview:
Q. As a member of the FRBM review committee, based on which the Act was amended, do you think the situation today, given the coronavirus health pandemic, and the subsequent lockdown, warrants a substantial easing?
A. I do not think that in the present situation an analytical framework that talks about “easing” and “tightening” is relevant. As I have said before, we are now repurposing from a business as usual economy to a warlike economy. In these circumstances money needs to be directed to the purposes of fighting the pandemic and dealing with the consequences of fighting the pandemic. We first need to clearly identify what needs to be done and what it will cost. We then address the problem of how (not how much) finance will be mobilised.
Q. What are the main pain points, which need immediate relief?
A. The first priority is to make sure we have the medical equipment and personnel to execute the measures needed to identify, diagnose, and treat those seeking medical attention. As the number of cases grow, we need a massive transitory increase in healthcare financing. We need more beds, quarantining facilities etc., but going forward, the binding constraint will be our healthcare workers. Each healthcare worker who falls sick, breaks down, or is unable to perform his/her job, retards our effort. You do not want a situation where, to use a war analogy, you have aircraft that are idle because there are no pilots or ground crew. So, we need to ensure that finance is not a constraint in increasing our spending on securing the health and lives of these personnel. I estimate we need to increase the CTC spending on these personnel by 350 – 400 per cent.
The second priority is to maintain supply chains such that people are able to get essential commodities and, going forward, other things needed to live a normal life. We need to spend on integrating unutilised supply chains and making sure these deliver from farm and factory to home. This is going to be expensive if social distancing is to be maintained.
Third, we need to make sure all migrant workers are secure in decent surroundings and have access to counseling, communication facilities, and government services on a priority basis. This will be expensive because our migrant workers lived in crammed and insanitary conditions in the first place and we need to hence create this infrastructure.
Q. The government announced a relief package, which was less than 1 per cent of GDP. What is your assessment of the fiscal relief requirement?
A. Again, “fiscal relief” is not an appropriate framework. In a warlike economy, government needs to do two things. One, protect national wealth and two, alleviate loss of national income as far as possible. This would encompass wage support, compensatory payments to those operating their own businesses and services (which is a significant chunk of the Indian workforce), and the temporary publicly financed coverage of costs associated with maintaining working and fixed capital including, but not limited to, interest relief. This will cost far more than 1 per cent of GDP, so I am assuming a much larger publicly financed support package is in the offing. I hope it is not further delayed. It has been forthcoming for quite some time now.
Q. What are the avenues for fund raising?
A. It is important to understand that financing will have to be provided at an elevated scale and therefore “fundraising” through relief funds etc. will not do the job at the macro level. Several calibrated steps are possible.
First, the government has considerable unspent balances which should be mobilized. This will take time; therefore, it should immediately use its WMA (Ways and Means Advances) window with the RBI to mobilise these finances. The RBI has enhanced the WMA limits but it is desirable that fiscal prudence be secured by linking the extinguishing of WMAs to specific resource mobilisation by government.
States are the frontline fighters of this epidemic. RBI should open a Rs 1 lakh crore zero interest WMA window for the states. The window should be for 11 months and its rollover can be reviewed in the ninth month. States could access this window according to some criteria. This simplest would be to use per capita population and then develop criteria according to need going forward.
Second, the government could design a specific purpose bond to raise debt resources. The current debt mobilisation system should be ring-fenced from this Covid specific debt instrument. My preference would be for a consol- a bond that pays interest during its lifetime, has no date of expiry, and can be traded. The government should announce whether and in what proportion consol will be amortized in every budget. The consol should be denominated in rupees though foreign investors should be free to buy them.
The third measure would be the nuclear one – to increase money supply and use the incremental money supply to fund the government’s fiscal deficit. This should not be undertaken except as a final line of defense as it will have eventual inflationary repercussions. However, should the situation warrant, there is no reason not to use this instrument at scale.
Thus I do not think availability of finance is an immediate constraint in this warlike situation.
Similarly, if money used to protect the net worth of companies by providing income and interest support but companies cut their purchases, then there will be profiteering. So, it is important to first have a clear picture from the recipients of how much, in what calendar, and to what purpose finances will be deployed before releasing finances at scale.
It is important to recognise that the states are funded well. It is distressing to see states cutting public sector
salaries; this will only further shrink aggregate demand and resources must immediately be deployed to prevent this. In addition to the WMA window I spoke of earlier, a Rs 1 lakh crore untied grant window should be opened for states and managed along the lines I have outlined for the WMA window.
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