Over the last few days, Finance Minister Sitaraman, has made a set of announcements everyday detailing a part of the government’s INR 20 lakh crore (~USD 266 Billion) economic package. This historic stimulus comes as India struggles to deal with economic effects of the outbreak of Covid-19. One common question people seem to be asking is if the government is really spending 20 lakh crore to give to people or businesses. Well, not really. These announcements/measures can be broken down into 4 broad categories: Liquidity measures, Fiscal Stimulus, Policy/Regulatory changes and New Initiatives.
Liquidity Measures:
Liquidity measures are an important part of the stimulus package as businesses and small entrepreneurs across country are facing the negative effects of the pandemic. In times of crisis as regular cash generated from business actives is almost negligible and traditional sources of funding dry up, providing liquidity support is critical to ensure business survival.
Several of the liquidity measures that are a part of this package include measures announced by the Reserve Bank of India earlier. This does not, however, include rate cuts and some other monetary policy decisions as they are kept out of the purview of the economic package
The measures announced by RBI are The Targeted Long Term Repo operations (TLTRO) part 1 & 2, of Rs. 1 lakh crore and 50,000 crore respectively. Under TLTRO, banks were allowed to borrow long term (3 year) money from RBI at the repo rate thereby reducing their cost of funds, in the hope that this would encourage onward lending by banks. There was a reduction in Cash Reserve Ratio (CRR) of 100 basis points that was expected to give banks an additional INR 1.37 lakh crore of liquidity. The easy borrowing under Marginal Standing Facility (MSF), which allows banks to access overnight funds, is expected to add another INR 1.37 lakh crore to the liquidity available with banks. All of these measures were aimed at providing banks with enough liquidity to enable them to extend credit to individuals and businesses, which in turn would boost economic activity.
Governor Shakitanta Das, in his speech on 17th April announced a special refinance facility for NABARD, SIDBI and NHB of RS 50,000 crore so that these government owned companies can then provide loans to sectors hit, especially hard, by Covid-19. An equal amount of funds was announced as a special liquidity support to Mutual Funds in the wake of the crisis at Franklin Templeton Mutual fund, triggered due to the onset of Covid-19.
This takes the total liquidity support provided by RBI to INR 5.24 lakh crore. However it would be important to remember that this may not be an accurate representation of the liquidity added to the economy as some of these measures have not been fully utilized till date.
The liquidity measures do not end here. In her presentations, the Finance Minister also outlined several measures to boost liquidity. Some of her major announcements include injecting Rs. 90,000 crore in credit to Power Distribution Companies (DISCOMS). This will provide the DISCOMS with a much needed liquidity injection as they face “unprecedented cash flow problems”.
The Medium, Small and Micro Enterprises (MSME) sector which is the backbone of the Indian economy was largely covered during the first tranche of the “Aatmanirbhar Bharat” presentation. Banks and NBFC’s will offer the sector INR 3 lakh crore in collateral free loans having a tenure of 4 years and an initial 12 month moratorium on EMI’s. This amounts to 20% of all outstanding loans to the sector. Over and above, Rs. 20,000 Crore will be provided as subordinated debt to stressed MSME’s. To encourage NBFC’s to lend to this sector, Sitaraman revealed a 20% partial credit guarantee scheme, meaning any default of loan taken by MSME’s, would be made good by the government to the tune of the first 20%. To ensure finance companies such as NBFC’s, HFC’s and MFI’s have enough money to lend, Rs. 30,000 crore will be used to invest in their debt, giving even lower rated entities (who generally have trouble raising debt), access to debt financing.
In a bid to assist farmers of the country to be “Aatmanirbhar”, INR 2 lakh crore will be provided through Kisan Credit Card. Further, Rs. 30,000 crore will be extended for crop loan requirements. INR 1 lakh crore would be provided towards funding for development of proper farm-gate infrastructure.
Small business who have already availed loans under Mudra Shishu scheme would be eligible for an interest subvention. This would help reduce NPA’s for banks and reduce the interest burden for borrowers. The credit linked subsidy scheme for home buyers was also extended by a year to 31st March 2021. TDS/TCS rates were also reduced by 25% to give more money in the hands of consumers.
While these are all steps taken by the central government to boost liquidity, certain leeway has been allowed to state governments as well to equip them to deal with the pandemic. The Ways and Means Advances available to states was increased by 60% and they were allowed to borrow up to 5% of their GDP as against 3% earlier, subject to specified reforms.
Fiscal Measures:
While several of the measures listed under other categories are bound to have a fiscal impact, only those measure that have an immediate and direct fiscal impact have been discussed here.
The first stimulus package presented under “PM Garib Kalyan Yojana” has an estimated cost of INR 1.7 lakh crore and was aimed at reaching out to the “poorest of the poor” with food and sustenance funds. Direct benefit transfers of Rs. 1500 to women Jan Dhan account holders and Rs. 2,000 to 8.7 crore farmers were given out. Free grain and pulses would be provided to the poor for the next 3 months. The daily wages under MNREGA were also hiked.
In her subsequent stimulus speech, Sitaraman extended the free distribution of grains and pulses to include migrant workers for 2 months.
To aid the MSME sector with equity capital, a Fund of Fund structure would be set up to enable a Rs. 50,000 crore equity infusion into these firms. The government would contribute Rs. 10,000 crore towards this initially.
A series of measures to support farming and food production related activities including Rs. 10,000 crore towards formalization of Micro food enterprises, Rs. 20,000 crore for fishing and related activities and creating adequate fishing infrastructure, Rs. 4,000 crore towards allocation of land for herbal cultivation and Rs. 500 crore towards beekeeping initiatives and for storage and delivery of fruits and vegetables each.
Several Infrastructure projects were covered under the announcements. These ranged from creating affordable housing for the urban poor to an investment of 50,000 crore for development of coal infrastructure projects. Viability gap funding for development of social infrastructure was raised to 30%. This means that for development of infrastructure such as hospitals and schools the government will provide funding of 30% of the cost for projects in order to make construction more lucrative. This is expected to cost the government Rs. 8,000 crore.
Notably, the government has provided an increased allocation of Rs. 40,000 crore in addition to Rs. 60,000 crore already provided in the budget for it’s flagship rural jobs creation program MNREGA.
Further, an increased spending on healthcare and preparedness for future pandemics was pledged.
Policy Changes/Reforms:
The steps towards policy changes and reforms can be broken down into 2 categories.
- Relaxation in norms – Several steps were taken to relax norms and provide flexibility to businesses to reduce the compliance burden, including extension of tax and returns deadlines, relief under RERA rules and fast-track payment of government dues.
- Reforms – Includes structural reforms that will enable meaningful progress in the times to come, outlined below:
- The definition of MSME has been widened to now include a larger range of companies, this will allow companies to continue growing without losing the benefits given to MSME’s.
- The IBC will not accept any new insolvency proceeding for a year
- An increase in the FDI limit for defense manufacturing from 49% to 74%, and a ban in certain weapons imports, proving a boost to domestic manufacturers.
- Reforms in the coal mining sector, including allowing commercial coal mining, auction of new coal blocks and infrastructure development.
- Steps towards enhancement of private investment in mining sector and removal of distinction between captive and non-captive mines.
- Efficient management of airspace to bring a benefit of Rs. 1,000 crore to the airline industry and have a positive environment impact.
- Developing India as a hub for maintenance, Repair and Overhaul of aircrafts
- Electricity Tariff policy reforms and privatization of electricity distribution companies in Union Territories.
- Disinvestment of PSU’s in non-strategic sectors
New Initiatives:
Some new initiatives outlined by the government are:
- Fast-Track Investment clearance
- Ranking of states on investment activeness
- Up-gradation of industrial infrastructure and online mapping of all available facilities
- Allowing only domestic companies to participate in government tenders for up to 200 Crore, giving a boost to the MSME sector.
- E-Markets to replace Trade fairs helping MSME’s struggling during the pandemic
- Rollout of “One Nation, One Ration Card” to enable beneficiaries to access PDS benefits from anywhere in the country
- 6 new airports to be developed
- Allowing the private companies in the space sector
- Promotion of online education during Covid-19
While these may seem like a lot of measures, the sufficiency of these measures is still in question. The actual fiscal impact of this is estimated to be between 1-1.5% of GDP. This number pales in comparison to other developed nations who have declared fiscal packages, which in some cases, upwards of 10%. While the circumstances and financial position of India is very different from the developed nations, we are left wondering if the measures announced are enough to pull the nation out of the crisis and revive its economy.
Any excessive spending would lead to increased borrowing that may see the countries sovereign rating fall to below investment grade, while inadequate measures would see the country fall into deep recession.
The announcements include several structural reforms that lay the foundation for the growth of tomorrow. However in such uncertain times one can’t be faulted for wanting to focus on the present. As the virus continues to spread and wreak economic havoc across the world, we can all only hope for a V-shaped recovery curve.
Until Then… Stay Safe!
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