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Government must balance fiscal prudence with people’s immediate necessities

Even the fiscally conservative President Donald Trump has announced nearly $300 billion in direct cash transfers to US citizens at the bottom of the pyramid. PM Modi would do well to have his government attack the problem from the demand side by putting money directly in the hands of the people.

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Last Updated: May 28, 2020, 11.30 PM IST
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India
The government should put its trust in the common man, just as it has towards businesses, and ensure an immediate bank transfer as a loan to those who need it.
By Americai V Narayanan & Kavya Narayanan

Measures to mitigate the Covid-19-instigated lockdown and subsequent economic shutdown announced by finance minister Nirmala Sitharaman earlier this month have woefully fallen short of stimulating demand so far.

Even the fiscally conservative President Donald Trump has announced nearly $300 billion in direct cash transfers to US citizens at the bottom of the pyramid. Prime Minister Narendra Modi would do well to have his government attack the problem from the demand side by putting money directly in the hands of the people.

However, a valid concern is if there is enough fiscal room for GoI to implement such a direct cash transfer scheme. To stimulate demand without straining government resources in the long run, one can consider immediate cash transfers as an interest-free loan, with repayment in the form of labour through anational employment guarantee scheme (NEGS).

NEGS should especially be targeted towards urban and semi-urban citizens, as they have been the most vulnerable during this pandemiclockdown. This would go a long way in providing migrant workers with work, instead of having to take harrowing journeys back home to their villages and town from their workplaces in the cities.

One could transfer Rs 5,000 a month for the next six months (a total of Rs v30,000) to each of 10 crore families as a loan, directly into their Aadhaar-seeded bank accounts. This loan can be paid off by any adult family member through the MGNREGA, or the proposed NEGS, by working for private contractors or even MSMEs.

These employers will deduct Rs 200 per day, in lieu of the loan repayment and deposit this with the government. They, in turn, get 10% of that amount as a rebate from the government incentivising them to employ these workers. If a family works for 120 days and pays the loan of Rs 24,000 within the next three years, GoI can treat the balance Rs 6,000 as a grant, which need not be paid back.

Private employers, contractors and MSMEs are important to this model. They will have to hire the worker at market wage rate, not at minimum wage — this additional income being the motivation for the agricultural worker to step out of his village to the nearest private work site. This also incentivises the private contractor to invest. It could essentially be part of the sops given to industry. It also results in the creation of productive assets.

Fiscally, too, this plays out well for GoI, as it recovers a major chunk of the money it spends. Thus, the government’s fiscal deficit would be lower than in case of a plain cash transfer scheme, industry gets a boost because the measure increasing immediate demand for their products, while also reducing their labour costs, and, most importantly, the bottom of the pyramid will get immediate relief from the current catastrophe. Win, win and win.

GoI has asked the opposition to provide constructive solutions. Bipartisanship is very essential in these trying times. The government should put its trust in the common man, just as it has towards businesses, and ensure an immediate bank transfer as a loan to those who need it. It must rise to the occasion to balance fiscal prudence with the people’s immediate necessities to help India to tide over the crisis.

( Americai is member, All India Congress Committee, and Kavya is an insurance professional)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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