BUDGET SERIES || CONSUMPTION

The solution to every problem can be found only if the problem is first decoded till the first principle. India’s economic slowdown should be treated and decoded the same way. The first thing that needs to be identified is whether the current slowdown in the economy is a cyclical slowdown or a structural slowdown. Cyclical slowdown is one that is characterized as a part of the business cycle, going through a trough which will eventually be followed by a recovery and peak. In gist, it is a short-term problem which can be solved through government’s fiscal and monetary policy. However, what the country is witnessing today is a structural slowdown and in order to garner a remedy for the situation, there needs to be a better understanding of the problem and there after damage control.

India’s growth story has always been driven by consumption. In terms of the components of GDP- government expenditure has been whooping for the economy, however government expenditure forms only around 10% of the GDP. Additionally, the fiscal deficit of the government raises concerns about what extent can the government afford to stretch the deficit to, especially with staggering tax collections. The current fiscal deficit stands at 7.5%, which is a notch higher than all the developing countries, barring Pakistan. Investments have been stalling, even after the corporate tax rate cuts. The reason is that if there is a weak consumption demand, why will the businesses invest even despite the incentives? The consumption demand, which is the most worrying concern, ironically forms around 60% or more of the GDP today. In such a situation, any policies, incentives or break throughs will not revive the economy until and unless there is a boost or rather revival of the consumption story of India. The current situation is worse than the 1991 fiasco, as during that time even though the government lacked the forex reserves, the consumption demand was strong. Today the government has ample forex reserves, but the main growth driver of the country has taken a backseat.

The demand can be broken down into urban demand and rural demand. FMCG sector of India, which is generally known for being the resilient and safe sector for the economy has been under trouble, which clearly highlights the gravity of the situation. There were times when the rural segment used to contribute 1.5times the urban segment for this sector. However, during the past few quarters the rural contribution has fallen to the level of urban contribution, and has dipped even more. Currently, the rural FMCG sales is growing by 5.2% and the urban sales is growing by 7.4%

One of the reasons for the above being, India is divided into an organized and unorganized sector. While the organized sector contributes two-third of the GDP, the unorganized sector contributes the rest, and certainly cannot be avoided. The informal sector is responsible for more than 80% of the job creation in the country, according to economists. The implementation of GST was done with the intent of formalizing the country. There has been interestingly a pattern observed, big firms in the industry that competed with a large portion of informal firms benefitted immediately after implementation of GST. The informal firms bore the compliance costs, many informal firms either shut down or witnessed a large drop in market share. The same firms which benefitted post GST, have now witnessed a decline in sales-reasons being slump in demand arising out of losses of job and high level of unemployment in the informal sector. For instance, biggies like Britannia, Marico first witnessed a plunge post demonetization. They again picked up post GST, due to the lessening of rivalry by their informal counterparts and now again a slowdown, due to their stressed counterparts.  

Additionally, there is an anomaly in the consumption behaviour of Indian consumers. According to the Consumption Expenditure Survey (CES), the expenditure compared between FY 12 and FY 19 indicates that the spending on durables, clothing, footwear, health, travel, entertainment and other miscellaneous good & services has actually increased. However, sectors like automobile and housing have witnessed a haunting slowdown. The anomaly is due to the lack of customer confidence. Customers do not want to spend on items requiring long term commitment in terms of maintenance and payments as they are not confident about their future income and revival of the economy. Hence, segments especially like travel and entertainment have seen robust growth figures as they are one-time expenditures for the customers. Additionally, events like big billion days witnessed e-tailors booking revenues worth $ 3 billion, plus 50% increase in terms of new customers for giants like Flipkart (mainly tier 2 and tier 3 cities). Major retail lending retail products, such as personal loans and credit cards continue to witness strong growth, though the pace may have decelerated. This brings us to the fact that slowdown does not necessarily showcase the lack of disposable income in the hands of urban middle class. These indicators highlight that there is sentiment issue, customers are still spending a robust amount of income in certain segments-segments which require one-time short-term low-ticket size expenditure, however not on those segments which are required to boost the economy.  RBI’s consumer confidence survey for November booked the lowest figure since its implementation back in 2010. The index stood at 85.7, which is even lower than the number observed in September 2013, where the country faced a BOP crisis. A reading below 100 denotes pessimism in the economy.

Budget 2020. The budget 2020 is imperative to bring the country out of a turmoil. There is a consensus view that the budget is likely to bring reforms which will stimulate demand and confidence of revival in the mind of Indian consumers:

With the corporate tax down to 25%, the next expected move of the government is a reduction in the income tax slab to leave more money in the hands of consumer. The current exemption of no tax for income up Rs. 2.5 lakh is expected to be increased to Rs. 5 lakhs. Slab of 5-10 lakh subject to a tax rate of 10% (20% currently), 10-20 lakh subject to a tax rate of 20% (30% currently) and above 20 lakhs subject to a tax rate of 30%. Next is increasing the deduction limit under section 80C from current Rs. 150000 to Rs. 250000. In order to revive investment and promote the housing sector, deduction for housing loan interest for self-occupied property is expected to increase from current Rs. 2,00,000 to Rs. 3,00,000. The rural economy needs to be given a priority; hence the budget should be focusing on bolstering the NREGA programme and funding rural road construction.

While all this may or may not work for the country, certain imperative deep-rooted measures need to be addressed to bring a long-term solution the country. One of the main forces believed to be positively linked to the consumption in an economy is the demographic dividend. India is believed to be the fastest growing country and unanimously agreed that it will reap the benefits of a “large working-class population” in the coming years. While there is no doubt of authenticity in the statement, what we fail to realize is that the above statement will materialize only when the current young population is provided with an environment of quality education and up scaling of skills. India is much behind this aim. Reforms in education and healthcare will pave the path for economic development in India. Successful Asian economies like China, Japan, South Korea, first focused on bringing reforms in the agriculture sector by promoting full-scale efficiency. Similarly, India should focus on reforms in agriculture in terms of access to seeds, technology, power and finance. They should look for ways to improve connectivity and facilitate easier leasing of land. Focus on such areas would not only solve the current problems but also cater to the problems the country has been facing for years but have been left unaddressed.

Uncovering the state of India’s financial sector

The global outburst of the COVID-19 pandemic has put an end to some de facto relationships, such as countries’ reliance on America, and shifting the geopolitical paradigm towards the Eastern economies. It has revealed that the infrastructural facilities available are futile until and unless the countries are efficiently utilizing them. China is supplying materials to all the countries today, even though it is interpreted as political propaganda. Time has truly tested the priorities of governments when it comes to choosing between the economy and the lives of humanity.

India has taken a commendable stance by enforcing the strictest and longest lockdown ever witnessed by any country. It has even surpassed developed countries like Italy and China. However, this alone will not ensure the success story of India.

India’s fiscal balance of both the center and the state stood at -7.4% in FY 20. The Government is already dealing with a debt heavy balance sheet. Nonetheless, it has made the undaunted decision to provide a financial stimulus package worth approximately 3% of our nation’s GDP, to ease the economic burden of the epidemic. Presently, only a handful of industries have been left unscathed by the crisis – the Insurance sector, the Healthcare sector, and the Telecom sector. In order to prepare the country for the post-pandemic situation, there needs to be a cleansing of the current financial services situation in the country, as this would have the most significant role in normalizing the economy when the lockdown ends.

In its attempt to do just that, the RBI introduced a slew of measures to provide relief to the financial sector, paying special attention to NBFCs and NBFC-MFIs. In India, NBFCs indisputably play a quintessential role in the financial inclusion vision of our Prime minister. However, the liquidity crunch faced by NBFCs has long haunted our economy, ever since the IL&FS crisis broke out in September 2018. Post the turmoil; banks have been wary of extending credit to this shadow-banking member. Moreover, the current wave of measures also proves to be inadequate in solving the liquidity problems that are being faced by this segment. The RBI has introduced a moratorium period of 3 months as a relief to the borrowers. This is problematic for NBFCs as they have no option but to grant this moratorium as most of their repayments take place in liquid cash, which currently isn’t feasible. However, flipping the coin, banks have not passed an order to grant this same moratorium to NBFCs. This situation leads to NBFCs not receiving any payments but yet having to make payments. They are also borrowers from mutual fund houses (MFs) and MFs have also been constantly reducing their exposure to NBFCs. As per a Credit Suisse Report, Fund houses have reduced their exposure to NBFCs by as much as 14% in March 2020 alone.

The micro finance institutions (MFIs) are another valuable segment of this sector. As per the data collected from SIDBI, the MFIs have been responsible for extending credit to 64 million individuals, who fall outside the reach of traditional banking. They have provided a rock sold support to low income families and boast a loan portfolio of USD 1.785 trillion as on November 2019. They will play an even more significant role post the lockdown as a number of individuals from tier 2 and tier 3 cities are dependent on these MFIs.

The Covid-19 crisis is posing a tough time for MFIs because the current lockdown has hit the vulnerable section of the society the most, and this section happens to be the customer base of MFIs. Hence, loan repayments are a far-fetched dream for these institutions. Moreover, MFIs employ around 2 lakh people who are primarily involved in field visits. Hence, one of the major concerns of high operational cost persist, as they cannot cut down the salary of individuals who are connecting these institutions to their borrowers. The acquisition of customers by MFIs happens mainly through door-to-door strategies and maintaining personal touch with customers. Therefore unlike banks and big NBFCs who can expand their loan book even during a lockdown by leveraging their tech-savvy target group, MFIs don’t have that option. A majority of the small and mid-sized MFIs borrow from NBFCs, which are further dependent on banks, and well, the moratorium issue has already been stated above.

According to a research conducted by ICRA, if MFIs are not provided a cushion to defer their payments to the lenders -mainly banks and NBFCs- their liquidity coverage would fall below 1, as can be seen in the table below.

Table 1, source: ICRA

The much awaited, Rs. 50,000 Crore TLTRO(Targeted Long Term Repo Operations) provided by the RBI is yet to prove its worth as the central bank isn’t essentially lending directly to NBFCs and MFIs but rather relying on banks to do so. As events unfold, it is being revealed how the banks are reacting to the second version of TLTRO. The first tranche of the offer by RBI has received bids worth Rs. 12850 Crore, which is only 50% of the Rs. 25000 crore. Below is a snapshot of the same.

Chart 1, source: Edelweiss

Private sector banks have stayed completely away from the bids. Banks are currently maintaining a united goal of sticking to their existing loan portfolio and staying away from fresh exposures, which might increase their NPAs. The risk aversion of banks can be clearly seen as they are parking more than Rs. 7 trillion liquidity surplus with the RBI even after a 115 basis point reduction in reverse repo rate, but are shying away from extending credit to the shadow banking sector. This is partly because banks are facing difficulties to find investment grade paper for categories of NBFCs under Rs. 500 crore and would be willing to lend more if no such category restriction was mandated. However removing these restrictions will defeat the whole purpose of lending to the not-so-big NBFCs.

We are still yet to see how the RBI’s measure of extending Rs. 25,000 crore to NABARD, Rs. 15,000 crore to SIDBI and Rs. 10,000 crore to NHB will play its cards in meeting their sectoral needs. In order for SIDBI to grant loans, there are two set criteria: a minimum investment grade of BBB is required as on 31st March, and the loan needs to be repaid in 90 days. These two criteria will automatically remove a good number of MFIs from the eligibility list. According to a recent report by the Micro Finance Institutions Network (MFIN), only 60% of the 52 MFIs in the country have an investment grade rating (BBB or above). Additionally, only 23 MFIs are eligible for the refinancing offered by NABARD.

The Financial sector is a sector, which is indispensable to save both the lives and livelihoods of the citizens of India. With the kind of problems stated above, if the remaining measures by the central bank prove tepid as well, it is clear that the RBI would have to find a way to directly step in to provide relief to NBFCs and MFIs. One should not forget that the country was witnessing a slowdown much before the pandemic struck, hence all efforts should be directed towards not entering the post-lockdown in a worse (if not better) condition than the country was in before the lockdown. A healthy and smooth functioning of the financial sector is imperative for India to achieve this goal.

Written By – Anjali Agarwal (Editor, TJEF)

HELICOPTER MONEY – Do we have an option?

Recently, we saw a TV channel in Karnataka, telecasting a program called Helicopter Drop. The channel reported that the central government has planned to drop cash from helicopters all over the country as a relief measure in the COVID-19 crisis. The channel was issued a show-cause notice from Press Information Bureau (PIB) for spreading such misleading information and creating unrest.

All this havoc was caused due to a misconception of the term ‘Helicopter Money’ or ‘Helicopter Drop’.

So, what exactly is it?

Helicopter money basically indicates printing large sum of money. It is an unconventional economic tool carried out by the distribution of newly printed money to recover an economy which is entering recession. The government of a country directs the central bank to increase the money supply by pumping in freshly printed cash, which reaches citizens by direct government transfer in most cases. This, according to many economists, boosts consumer spending, helping the economy to revive (we know that the share of ‘Consumption’ factor in India’s GDP is a whopping 59%). This situation is analogous to a helicopter dropping huge chunks of cash over the public, hence the name.

This is same as ‘Quantitative Easing’, isn’t it?

Well… not exactly! Both ‘Quantitative Easing’ and ‘Helicopter Money’ involves printing a lot of cash. But, in Quantitative Easing, the central bank uses this cash to purchase government bonds. Since bonds are debt instruments, the government is expected to repay the amount at maturity. Whereas in a Helicopter Money exercise, there is no such repayment.

What is the necessity now?

We already had a bleak economic outlook forecasted for this year. With weeks of slumped production due to lockdown and an anticipated stagewise relaxation of lockdown, the economy could be pushed down the cliff.

The government, along with The Reserve Bank of India, is planning for a series of measures. The reduction of interest rates and tax exemptions could benefit the businesses. However, before considering all the economic aspects, we must ensure that there is enough cash in the hands of people who used to rely on daily wages. We must not head to a situation where more people die of hunger than the virus. In that way, an upward push in the money supply seems to be the only option.

While nations around the globe are proclaiming 10-15% of their GDP in the stimulus packages, our actions seem quite modest. In this fight against the novel virus, we are aware that the government has no other choice but to increase its expenditures. On the contrary, the revenue streams are getting slender. This make it obvious that the fiscal deficit is going to take a hit. So, the action of helicopter drop would also be a method of monetizing this deficit.

Great then!! Are there any roadblocks?

The greatest and most obvious risk is that of inflation. With an excess of money flowing in the market, coupled with a stagnant production, could lead to hike in the prices. Also, we are not an economy where the inflation levels are much lower. These conditions increase the danger of a stagflation.

Another potential hazard is the loss of investor confidence due to a devalued currency. Investors may lose their interest in an economy where the currency is not stable, unlike USD or EUR. They will eventually pull out their money out of the system, leading to a worsening fiscal condition. However, India’s G-Secs is not very accessible to foreign investors. So, this risk is mitigable.

There is also a slight risk of citizens not spending the transferred amount. If the beneficiaries choose to pay off debts or save money that have been transferred, there could be a dilution of purpose of boosting GDP.

While analysing all these aspects, we must remember the fact that we do not have many alternatives to choose from. The RBI could either carry on with the ‘Helicopter Drop’ action as suggested by many economists or deal the situation with open market operations. What the government chooses to do is something we have to wait and watch.

Written By – Nagarajan P (Editor, TJEF)

Removal of Dividend Distribution Tax

The recent decision by the government to remove Dividend Distribution Tax means that the shareholders will now have to pay the tax on dividends they receive. How unfair is it to the shareholders? Or is it really? Let’s dive in.

In India, there is a tax that is imposed by the government on the companies that paid dividends to its shareholders. Although it’s not taxable in the hands of the shareholders, ultimately their share of profits become less. When the company is paying tax for its shareholders, all the shareholders have been charged a flat rate of 20.56% irrespective of their economic status.

Let us examine how the reform (removal of Dividend Distribution Tax (DDT)) changes things.

From April 1, 2020, the companies would not be charged the DDT when they distribute the dividend. It will be the shareholders who receive the payment, on whom the tax will be imposed. Let’s just suppose, Hari and Krishna were two shareholders and they’ll receive their part of dividends from the full amount that the company had set aside for dividends. No tax has been charged on the amount set aside. It will be Hari and Krishna who’ll be paying the tax now. Here is where things become interesting and fair. The same tax percentage will be charged on the dividends received as is defined by the tax slab they fall in according to the income earned. Both the shareholders will now pay a different percentage of tax on the dividend received.

Suppose Hari belonged to the lower income group with under Rs 2 lakh income. He comes under the tax slab of 0% and therefore is not liable to pay the tax on dividends received. So, on dividend declaration of Rs 100 previously Hari was getting Rs79.44 at 20.56% DDT due to indirect incidence of DDT. But now he’ll be getting full Rs 100 and won’t be taxed.

A screenshot of a cell phone

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The table suggests that shareholder in the tax bracket of 20% or below are sure to gain from removal of DDT

On the other hand, Krishna who is high net worth individual and falls in the highest tax slab of 30% (can go up to 43%) will be paying that much percent on the dividends received as well. Along with High Net Worth Individuals(HNI), Promoters of the corporations we talked about earlier will also stand to lose due to this new regime. The one who earns more is taxed more. Progressive taxation at its best. To escape the increased incidence of taxes the HNI’s can invest in Mutual Funds (MNC fund or PSU fund). The HNI’s will get the benefit of pass-through dividends as Mutual Fund’s income is not taxed.

Another stakeholder is the company that is paying Hari and Krishna their dividend. With DDT the company had to deal with several compliances that go along with taxes and incur additional expenses. For example, the company had to deposit DDT within 14 days of declaration or distribution of dividends whichever is earlier. Otherwise, interest is charged on DDT with a rate of 1%.

With the removal of DDT, the onus of paying tax lies on the individual shareholder. Company is free from that burden. Therefore, it becomes easy for it to operate. This will help the ease of doing business in the economy and more companies from foreign markets will find the country attractive to work in.

When the company used to pay the Tax for its shareholders, even though they received reduced income, Foreign investors couldn’t claim Tax credits in their home country. With the Tax incidence now lying directly on the Foreign investors, they are liable to claim Tax credits. This makes their investment in India more lucrative. Hence with the removal of DDT, we will see more Foreign Portfolio Investment (FPI’s) coming in.

As for the government, removal of DDT is a step in the direction of improving the ease of doing in India, something that the government has been targeting from all fronts. The only catch here for the government is that it must forgo Rs 25000 crores of its revenue after the removal of DDT. Economic slowdown followed by a reduction in corporate taxes has already plummeted government’s reserves and now we see the elimination of DDT. But on the flip side, the removal of DDT is directly boosting the income of the Indian middle class. Hence as their purchasing power rises, so does the demand in the market. Therefore, removal of DDT can be the Government’s attempt at curbing Demand-side aspects of the economic slowdown.

Looking at the impact of the removal of DDT on each stakeholder:

  • Retail/ small Investors: One of the by-products from the removal of DDT is to increase the participation of retail investors in capital markets. Small investors are sure to be the ones who are going to be benefitted by this step of Government.
  • HNI’s and Promoters: This is the only segment that will be negatively affected by the removal of DDT. However, on flipside by investing in Mutual Funds, they can minimize the loss. That’s another impact of the removal of DDT, promotion of Mutual Funds.
  • Foreign Investors: They will be able to claim their tax credits in their home country. Hence there won’t be cascading of the Tax and they’ll stand to earn more from India making it a Favourable destination to invest.
  • Companies: The High dividend-paying companies would have to worry about the compliances for paying the dividend. Hence it will be easier for them to work in India.
  • Government: Only the time will tell if the government can meet its objective of
  • Short Term: Aiding the demand-side factors of economic slowdown. Increasing the purchasing power of the middle-class people of India.
  • Long Term: To make India a profitable place for Foreign investors to invest in. Making the Indian Tax system just and transparent.

In all, removal of DDT is a major step and has the potential to solve a lot of problems.

Written By – Ritwik Garg

A work-from-home economy

It’s 9.30 am on a Monday morning. You finish your breakfast and walk towards the kitchen to dispose your plate. As you do, you catch a quick glimpse outside through the window – the streets are deserted, save for a few lone vehicles making their way to a friends’ or relatives’.  You open the window and all you hear is the sound of the wind lashing against your windowpane. What’s more, the temperature seems to have fallen by a noticeable amount. As you slide the window shut, you can’t help but smile as a cool breeze brushes past your cheek. You try to recall – when was the last time you experienced such pleasant weather at 9.30 am in the peak of summer? Probably never, unless you consider the times you reached office early and sat in one of the meeting rooms, whose air conditioners were programmed to operate at a set temperature. You chuckle at the thought of comparing the weather to your office’s air conditioner. Just then, the doorbell rings, interrupting your thoughts. It’s probably the neighbors, whom you have known since your childhood and with whom you have been meaning to plan a road trip to a nearby city. You greet them with open arms and offer them some tea. After a brief discussion, you walk them to their doorstep and bid adieu.

You remember that it is the time of the year which you have been preparing for profusely – the day of the appraisal meeting. As you power on your laptop and log into skype, you collect your thoughts and revise some key figures in your head that are sure to reflect your performance over the past few quarters. You seem confident that you have not missed anything. The meeting goes better than you had perceived, and you promise to treat yourself by going to that fancy Chinese restaurant in South Bombay for lunch. The one that you always put off going to because of its sheer distance from your office and the heavy traffic that always ensued. You calculate that it is located at double the distance from your house, but you are sure that it would take you at most half the time to get there. You leave that thought for later as you get down to work. After marking your attendance in the online attendance software, you reply to some emails from your boss and a few clients.

The next three hours rush by and as you’re about to break for lunch, you hear a nightingale singing by your window. These birds come out during the day? Doesn’t matter. You take in the melody and ask your parents if they would like to join you for lunch. They gladly oblige. You fetch your car keys and tell them where you’ll are headed. As you make your way out of your building gate, you put down the windows of your car and allow the fresh air to greet you. The air seems to carry with it a pleasant scent, now that it is almost entirely deprived of carbon monoxide and other pollutants generated by our species. The only sounds that can be heard are that of a handful of stray engines whizzing past you on perhaps similar expeditions, and of birds chirping. You smile as your parents draw a comparison to their childhood days when traffic was contained, and pollution was not such a nuisance. It takes you no more than 25 minutes to cover the 21 kms between your house and the Chinese place. Now that’s a record.

You enter the restaurant and request your parents to place the order, while you reply to a message on your office Whatsapp group. It appears that an intern would be joining your team from tomorrow and you are due to take her interview on skype today evening. As you reply with a thumbs up, you over-hear a conversation from the adjacent table. A family of 4 trying to decide the venue of their vacation the following weekend. And during this off season! It’s probably the concept of work-from-home that has empowered families like these to plan such delightful trips. The word ‘home’ in ‘work-from-home’ does not necessarily mean one’s own home. So long as you have your laptop in person and a decent internet connection, your home could be on a bench by the lake for all you know! Lunch arrives without much delay and after having a sumptuous meal and thanking the waiter for his service, you drive back home with your parents snoring on the backseat. You play some music, so you don’t doze off yourself.

The next 3 hours rush by at your work-from -home workstation and finally you receive a reminder of the skype call you have with the intern. You have 20 minutes until the call, so you decide to treat yourself to a cup of ginger tea from downstairs. While you cross the park, you spot a father playing frisbee with his infant daughter while his laptop rest on a nearby bench. Just as he tends to his laptop, the mother serves as his replacement. The child is happy as ever. After your short break, you find yourself face to face with a lady in her mid-twenties, and who is due to intern at your organization starting the following day. After a brief meeting, you get back to shooting some emails and scheduling some client meetings, which would customarily take place at Mainland China or a Starbucks outlet depending on the time of the day.

You decide to call it a day when the clock strikes seven. Tonight, you would be joining your cousins for dinner on the terrace of their new home in Navi Mumbai. The distance, although in excess of 30 kms, doesn’t bother you much since you know the journey would take no more than 30minutes. After dressing for the occasion, you drive your car out of the garage and pick up a box of sweets from the nearby sweet shop. At 8 pm, you find yourself sitting on the terrace of an elegantly lavished house in Khargar (Navi Mumbai). As you congratulate your cousin and make your way to a table by the warm fireplace, you smile and wave at some known faces. As you sit by the terrace wall facing the street, Your cousin is the first to speak. “It’s quite nice this way, isn’t it? I have all the time in the world to devote to matters of interest and I can even afford to meet my parents in Pune every weekend!”. “It most certainly is”, you agree. You think back 1 year from the current date and reflect on how things came to be this way.

The COVID-19 outbreak, in all its viciousness, seemed to have played a vital role in the scheme of things. Shortly after the viral outbreak had been officially declared as contained by the WHO, major signatories of the Paris agreement – an agreement within the United Nations Framework Convention on Climate Change (UNFCCC) had got together and signed a deal to employ work-from-home in their respective unions with immediate effect. This had been done in close consultation with the WHO, which pointed out that global ambient air quality had drastically improved on account of the viral outbreak while there was a steep drop in PM10 levels worldwide. Drawing a conclusion based on this observation, the United Nations calculated that the majority of the significant emitters would be able to meet the Paris Agreement deadline in half the time, perhaps lesser! The signatories had approved, and the agreement was ratified without much delay.  The greatest pandemic of the 21st century appears to have come with a subtle message – “Preserve planet Earth!” Because without it, there would be no such thing as you or I. And frankly, who better to teach us this lesson than the oldest inhabitants of our planet?

Written By – Shomit Sengupta   

Dealing with COVID-19: The Danish way

COVID-19 has wreaked havoc around the world in ways unimaginable. Turning to the business sector, many issues arose which was unprecedented and it catalysed the already brewing geopolitical concerns.

According to Business Standard, the economy would be hit by 3 major waves-

1. Worker layoffs, curtailment of business investment, disappearance of retirement nest eggs

2. Households coming to terms with their much diminished wealth

3. Reduction in business investments

Countries around the world have frozen their economies through lockdown to curb the spread of COVID-19. Radical times calls for radical plans. The government of Denmark has come up with one such economic plan – to pay the businesses to keep their employees.

Many Private companies has been hit so badly by the pandemic that they may have to do mass lay-offs. The Danish government has agreed to pay such companies 75% of the employees’ salary to avoid mass lay-offs. This would require them to spent almost 13% of the country’s GDP in just 3 months. Economists around the world has raised concerns about the feasibility and practicality of this plan.

According to Peter Hummelgaard, the Employment Minister of Denmark, this plan is right for the extraordinary health crisis the country is facing. If this was an ordinary recession, the government would have gone for some traditional unemployment programs. However, the current scenario may lead to a structural problem due to the combined effect of mass lay-offs and reduced aggregate demand. The cost to the Danish economy as well as to their deficit due to this would be much more if they do not invest in this economic plan. To put it simply, it is more expensive to do less.

The Danish government understood that it would be inevitable to fire some of the workers due to economic inactivity. But if the economy is to recover after 3 months, when the threat of COVID-19 hopefully vanishes, the cost and delay of rehiring may act as a bottleneck. Hence, it is better to keep the existing workforce by paying them for not working.

Under this economic plan the Danish government would cover the following:

a) Salary of employees

b) Fixed cost like rent

c) Sick leave compensation

d) Postponement of deadline of taxes

So it’s clear that this is a generous plan. Then isn’t it possible to defraud the government by pretending to send the employees home while making them work secretly? Well, no.

Denmark is a highly digitized country. The government can easily keep track of businesses and see their working via their transactions and other records. Moreover, the employer has to obtain an authorized accountant’s sign to proceed with their compensation application.

Now, consider whether this economic plan is adoptable in India. And if adoptable, will it work? For that let’s take a look at the Danish society. The pace at which the government passed this economic plan is truly commendable, i.e., a couple of days after they announced lockdown. This is despite the fact that government is a coalition of as many as 10 parties. Moreover, a tripartite agreement had to be reached between the government, the unions and the employers. Could it have been this easy in India? Most probably, not.

Written By – Taniya John (Editor, TJEF)