Micro, small and medium enterprises (MSME) must be saved from being closed down, otherwise the country’s industrial capacity will shrink and lead to more imports and eventually inflation for years to come, top economists discussed at a webinar on Tuesday.

V Anantha Nageswaran, Member, Prime Minister’s Economic Advisory Council, Pronab Sen, former Chief Statistician of India, Rathin Roy, Director and Chief Executive National Institute of Public Finance and Policy (NIPFP) and Ananth Narayan, Associate Professor at SP Jain Institute of Management Research (SPJIMR) took part in the discussion on what is needed to revive the Indian econony, organised by The Centre for Financial Studies at Bhavan's SPJIMR.

The economists argued that the government must work on a well communicated medium term strategy so that the vision is clear and measurable.

"If demand contraction is extended, you are going to see a bloodbath," said Sen. “Next you will see a supply constraint, because the capacities have closed down, which may lead to inflation down the line. If you have any demand stimulus, do it now. Don’t do it three months down the line because you may have missed the bus,” Sen said.

Rathin Roy expects a slide of 14-15 per cent in the nominal GDP growth rate because of the demand slide.

A vast part of the economy will get affected due to the lockdown. Even as there are positive mitigating factors, such as ample food security, a good monsoon and healthy rural economy. Banking system non-performing assets (NPA) can double to 18-20 per cent of the advances, fiscal deficit can move upwards of 14 per cent of the GDP.

“This is possibly the biggest economic crisis that we have seen in our lifetime. The government must spend where spending is needed. There is inadequate relief for businesses, their bottom-line is hurting,” said Ananth Narayan.

The government measures taken earlier were not stimulus per se, but only temporary relief measures, Roy said. Cash transfers of Rs 500-1,000 doesn’t help whatsoever, opined the economists.

Nageswaran, while opining that more measures are indeed needed, also defended the govenrment’s stance in not doling out immediate measures, but taking a medium to long term view in their stimulus package. "The event in border with China perhaps showed the government was right in preserving some firepower. Having said that, considering the GST collections are down only by 15-20 per cent, some measures can be taken that can be rolled back later,” Nageswaran said.

The liquidity route was rather a compromise, Nageswaran said. As the government could not have let the interest rates in the economy shoot up in the face of higher borrowing. Nageswaran said economic measures are needed but must come with a condition of increasing productivity and governance for companies.

The MSMEs are the largest employer in the country, but are highly vulnerable to shocks. Narayan proposed that of the Rs 20 trillion of MSME loans, the government can absorb the interest payment for a year or so. “This will hardly take about a trillion rupees, but can go a long way for these companies,” Narayan said.

Roy proposed that any government delivery scheme should be done through states or non-government agencies as the center's delivery system, with 30-40 per cent leakages, is “terribly counterproductive.”

Sen was in favour of direct benefit transfer as that would be more “bang for the buck.”

The participants also agreed that in the current situation, when all the countries are becoming protectionist, there is no point depending upon exports to boost growth. This could also be a bad time for disinvestment, as whatever private investment demand is there in the economy would get diverted to buy the government assets, which doesn’t help the overall economy.

According to Roy, the lesson from the disaster is that there are huge socio-political barriers in growth. "Millions of people walking back home for 2000 kilometers tells you the bedrock of our social process is very weak,” Roy said, adding, a good healthcare and education system end up benefiting not just individuals, but the country as a whole which builds the basis for reforms and economic prosperity.