Govt aid can help informal sector fight virus effect
3 min read . Updated: 25 Mar 2020, 12:27 AM ISTPuja Mehra
Mint explains why and how the government must on a war footing help the sector cope with the debilitating economic impact of the pandemic
coronavirus, coronavirus pandemic, impact of coronavirus pandemic, informal sector, Lockdowns,economic impact Covid-19 outbreak, minimum wages, Mudra loans, fiscal deficit, government spending
Lockdowns, a preventive move to slow down the spread of Covid-19, will severely hurt India’s informal sector, especially daily wagers. Mint explains why and how the government must on a war footing help the sector cope with the debilitating economic impact of the pandemic
How large is India’s informal sector?
Over half of India’s gross value added comes from the informal sector, which mostly engages informal workers. Nearly 87% of India’s workforce is informal, with no written contract, paid leave, minimum wages or terms of work as per regulations. The share of the informal sector is the highest in agriculture, followed by trade, construction, and real estate and professional services. Lockdowns will disrupt these tiny businesses, due to which the sector could suffer a cash crunch, and income and consumption shocks, forcing them to borrow at steep rates from informal lenders. Many may slip below the poverty line.
How should the govt support this sector?
The challenge for policymakers will be to design channels for delivering relief and support. Few levers are available to them for mitigating the economic impact of the pandemic and lockdowns on the informal sector. Some existing Mudra loans may have to be written off, repayments deferred and new loans extended. Tax cuts are ruled out, as the turnovers of unorganized sector firms are typically smaller than the threshold required for goods and services tax (GST) registration or payment of income tax. GST rate cuts will have limited impact, with lockdowns reducing supplies and consumption.
Should informal workers be given cash transfers?
Yes, immediately. NREGA worksites cannot operate during the lockdowns, but the government can still clear pending payments urgently. It must also provide food stamps and transfer top-up relief payments to NREGA and PM-Kisan direct benefit transfer accounts. However, it will not be able reach those informal workers who don’t have such accounts.
What’s the way out in this situation?
Besides ensuring emergency concessional Mudra loans and generous terms with forbearance, the government may have to step in as a buyer of last resort. Nearly half of the informal sector firms operate from homes with family members as the only workers. So, they can be productive during the lockdowns. The challenge is to ensure supply of inputs and access to markets. Government agencies can tap the procurement channels of rural cooperatives and self-help groups to source emergency goods such as masks from the sector.
Will the fiscal cost be a challenge for the govt?
No. To create fiscal space, the government can consider pay and pension cuts for its employees. The Seventh Pay Commission reward was based on forecast of healthy revenue growth and 7% plus GDP growth—that’s no longer the case. In extreme situations, the Centre can allow the fiscal deficit to expand and let RBI print money. Higher government spending on relief for the sector will not push up inflation, as lockdowns reduce demand
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