The nationwide lockdown announced in March to contain the spread of novel Coronavirus has knocked down Indian economy causing a loss of Rs 20 trillion to the GDP and rendering over 10 crore workers jobless. Will the mega Rs 20 lakh crore economic package provide the required impetus and support to put the economy back on tracks or will it act merely as a band-aid?
An economy growing at a good rate needs no stimulant from the government. Credit provided by banks and demand generated from GDP/income is sufficient drivers of growth. The stimulus is needed when growth slows down or gets upended. In such difficult times, governments are expected to provide extra demand push and banks extra credit.
India grew at 7-8% during 2014-2019 without any stimulus from the government. Fiscal deficit which had ballooned post-2008-09 crisis was consistently reduced. Indian economy started slowing in 2019-20 when it grew by about 4%. Most stringent lockdowns imposed to halt Covid-19 virus disrupted the economy massively. About 70% of businesses remained shuttered for 40 days. Approximately 50% businesses remained closed until the end of Lockdown 3.0. One-third of the economy is likely to remain disrupted during lockdown 4.0. It would take months before normalcy returns. For some businesses like entertainment, transportation etc., new normal might be only a fraction of their output. On the whole, the Indian economy is likely to suffer degrowth of not less than 5% in 2020-21.
Economic pain has fallen disproportionately on small businesses and their workers. A part of jobs might be permanently lost as reflected in utter desperation of migrant labourers returning to their villages. These businesses and workers needed fiscal support to survive the catastrophe and revive their businesses. The stimulus was additionally needed to generate consumption and investment demand.
The government announced an Rs. 1.7 lakh crore package on March 27th. Jan-Dhan bank accounts of 20 crore women were credited with Rs. 1000 an additional foodgrain was also provided. While it did provide support to suffering workers, it was too small and did not reach millions of migrant labourers. No other fiscal support measures were announced for businesses and workers in the next 50 days. Migrant workers, after spending their savings and losing all hopes, started walking hundreds of kilometres. Businesses, with their back broken, kept waiting for lockdown to be lifted.
Prime Minister announced a bazooka of Rs. 20 trillion stimulus on May 12. This was to be accompanied by a good dose of reforms. The package delivered by the Finance Minister falls well short of high hopes raised by the Prime Minister.
Design and contents of the package are striking in several ways. The stimulus package almost entirely uses the credit channel (more than 90%) for delivering its punch. The fiscal impact is less than Rs. 1.5 trillion (.75% of GDP). The package rolls in four principal interventions - RBI’s liquidity support to banks, banks’ credit support to small businesses, building infrastructure using borrowings from institutions like NABARD and clearing pending bills like DISCOMs’ overdue.
Credit stimulus, announced by Finance Minister in her first press conference, promised additional credit of Rs. 3 trillion backed by government’s guarantee to 45 lakhs standard MSMEs. Stressed MSMEs were promised subordinated debt of Rs. 20,000 crores backed by 20% first-loss guarantee. There are several issues with this part of the economic package. There are about 7.5 crores MSMEs in India. The package announced will at best reach 45 lakh MSMEs. About 7 crores micro MSMEs, which suffered the most and needed fiscal support badly, will not get even loans.
The creditworthiness of 45 lakh MSMEs have suffered further during the economic lockdown. The banks will be hugely risk-averse to grant additional credit to such MSMEs. SIDBI issued a scheme on May 16 to operationalise government guarantee. 20% credit assurance has been diluted to 10% and 15% in the SIDBI scheme. Additional loans might substitute their normal increase in credit limits. Only future will tell how many of the 45 lakh MSMEs get additional loans. The MSMEs needed immediate support, that too as grants, to tide over difficult times. Instead, less than 10% of MSMEs have got promises of some credit only.
More than 50% of the economic package consists of liquidity measures. Liquidity is neither credit nor stimulus. Liquidity ensures that financial system keeps functioning and does not freeze. Liquidity measures, however, are the flavour of the season. RBI’s liquidity support to banks and governments, of about Rs. 8 trillion, was announced in March and April. These liquidity measures have proved dud so far. The banks have returned more liquidity to RBI by depositing Rs. 8 trillion.
The largest liquidity measures announced by FM envisages clearance of outstanding payments of DISCOMs. Government-owned NBFCs- PFC and REC- would provide loans of Rs. 90000 crores to DISCOMs to clear dues of generating companies like NTPC and other suppliers. Clearing bills is no stimulus. It would only substitute creditor A by creditor B. In another measure, the Government promised guarantee to a government SPV to raise loans of Rs. 30,000 crores to buy investment-grade papers of NBFCs, HFCs and Micro-Finance Institutions. Such announcements have long gestation period. When will the SPV be created, when will it raise loans and when will it buy such papers? It may not see the light of day. The other measure was to make some more assets eligible for the Rs. 45000 crore scheme of partial risk guarantee announced in Budget 2019. This programme has not taken off in the last one year. It is unlikely to come to life with his new stimuli.
Several announcements have been made proposing creation of funds with large amounts to target infrastructure investments. A Fund of Fund has been proposed to channelise Rs. 50000 crore equity investment in MSMEs. Another Rs. 1 trillion Agri Infrastructure Fund has been proposed to build farm-gate infrastructure. Another Rs. 10,000 crore Scheme has been proposed for the formalisation of Micro Food Enterprises. Yet, another Rs. 20,000 crores have been promised for fishermen through Pradhan Mantri Matsya Sampada Yojana.
An Animal Husbandry Infrastructure Fund, of Rs. 15000 crores, has also been thrown in. Most of these funds and schemes are part of the existing budget. The order of magnitude of amounts proposed to be invested has been raised by 5 to 50 times. The Fund of Fund Scheme has a budget provision of Rs. 200 crore which can operationalise MSME investments of Rs. 1000 crores. There is only Rs. 600 crores of MSME funds in the country presently. Building a Fund of Fund of Rs. 50000 crores for investment in MSME Funds is an impossible feat.
Likewise, re-financing farmgate infrastructure projects of Rs. 1 trillion, through banks, cooperative institutions etc. will take many years. It would be a big achievement if even Rs. 5000 crores of refinancing for such infrastructure investments can take place in the current year.
FM promised Rs. 40000 crore additional outlay for MGNREGA. Other fiscal measures like additional food subsidy, capital of Rs. 4000 crores for stressed credit guarantee fund of Rs. 20000 etc. does not need any immediate change in budget outlays. All these can be taken care of in the supplementary budget in the monsoon session.
From a fiscal viewpoint, the government has struck a good deal. There is a saying in Hindi- “heeng lage na fitkari, rang choko hoye’ (you don’t spend really anything but it generates vibrant colours). Fiscal Stimulus announced by the government will not cost much to the government. Alas, the package will not provide any survival support or economic stimulus either.
(The writer, a former Finance and Economic Affairs Secretary, is an Economy, Finance and Fiscal Policy Strategist. Views are personal)