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India’s Stimulus Push: A Stitch In Time Saves Nine

Author: Kumar Shankar Roy/Wednesday, May 20, 2020/Categories: Exclusive

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India’s Stimulus Push: A Stitch In Time Saves Nine

The immediate fiscal cost of the package is only about Rs 2 lakh crore, which falls short of stock market’s expectations; Thrust on reforms announced as part of the package will drive long-term benefits if translated into action

Finally, the cat is out the bag. The cloud over Rs 20-lakh crore economic package announcement has been lifted after the Union Finance Minister NirmalaSitharaman disclosed the package details in five tranches during May 13-17. The overall stimulus provided through the Atmanirbhar Bharat Package is Rs11.02 lakh crore (new) and the rest (Rs 9.9 lakh crore) was part of the earlier measures as well as steps taken by the RBI. In total, that’s Rs 20.9 lakh crore as per data shared by the government. So, 53 per cent of the Rs 20.9 lakh crore is new, while the rest 47 per cent is already known. The immediate fiscal cost of the much-vaunted package is estimated to be about Rs 2 lakh crore, which falls quite short of consensus market expectations that wanted demand and consumption boost. However, the big thrust on reforms announced in the five tranches bodes well in the long-term if the initiatives are translated into action on the ground. However, the mixing of near-term emergency measures with longer-term/ongoing initiatives is perplexing for some.

The Indian economy has lost a minimum Rs15-20 lakh crore due to the Covid-19 outbreak. Hence, it was natural for Indians to expect a package that would mark a turnaround. This didn’t happen. While the Central government may have also wanted to give a big shot in terms of demand boost, honestly put, it doesn’t have that kind of money. Plus, the government machinery seems wary of a sovereign rating downgrade from international agencies given the slowdown in the economy. This may have prompted NirmalaSitharaman to do a balancing act as against expectations of her government giving lots of money to people to spend. With Lockdown 4.0 now in force till May 31, India remains quite some time away from handling the virus. In short, while the announcements lessen the damages inflicted by the pandemic, most of it would be through contingent liabilities rather than direct fiscal measures. This would limit fiscal slippage, but may not give the much needed large boost. Read on to know more.

Bird’s Eye View

Across the globe, countries have provided various relief packages to help their ailing economies amid the lockdown and lower economic activity with scale of fiscal packages varying from as high as 14.5 per cent of GDP to as low as 0.1 per cent of GDP. Most countries have announced measures to support the small businesses, expanded unemployment benefits, spared amount for hospitals and testing, providing food safety net, tax rebates as well as deferrals. Some have innovated. Export support measures were announced by Germany. France suspended school tuition fees. Spain did a temporary subsidy for household employees. Special State guarantees were given to businesses and households by Italy. Subsidized interest payments were announced by Bangladesh. Kenya reduced various tax rates for providing relief to tax payers. This information has been compiled by SBI Research.

India had a different take on economic stimulus. As mentioned above, the Rs 20.9-lakh crore package presented by the Union Finance Minister has two parts. The first part is what was already announced by the Centre and the RBI. The revenue lost due to tax concessions since March 22, 2020, (Rs 7,800 crore), PradhanMantriGaribKalyan Package (Rs 1.7 lakh crore ) and PM’s announcement for Health sector (Rs 15,000 crore) is total are valued at Rs 1,92,800 crore. Additionally, the RBI measures are valued at Rs 8.01 lakh crore. Put together the earlier Government steps and RBI measures are valued at Rs 9.94 lakh crore.

The new part, announced between May 13 to May 17, is valued at Rs 11.02 lakh crore. This package was announced over five days. On Day 1, the announcements were worth Rs 5.94 lakh crore. These included Emergency W/C Facility for Businesses, including MSMEs (Rs 3 lakh crore), Subordinate Debt for Stressed MSMEs (Rs 20,000 crore), Fund of Funds for MSME (Rs 50,000 crore), EPF Support for Business & Workers (Rs 2800 crore), Reduction in EPF rates (Rs 6750 crore), Special liquidity Scheme for NBFC/HFC/MFIs (Rs 30,000 crore), Partial credit guarantee Scheme 2.0 for Liabilities of NBFCs/MFIs (Rs 45,000 crore), Liquidity Injection for Discoms (Rs 90,000 crore), and Reduction in TDS/TCS rates (Rs 50,000 crore).

On Day 2, Rs 3.10 lakh crore worth announcements were made. These included Free Food grain Supply to Migrant Workers for two months (Rs 3,500 crore), Interest Subvention for Mudra Shishu Loans (Rs 1,500 crore), Special Credit Facility to Street Vendors (Rs 5,000 crore), Housing CLSS-MIG (Rs 70,000 crore), Additional Emergency Working Capital through Nabard (Rs 30,000 crore) and Additional credit through KCC (Rs 2 lakh crore).

On Day 3, a total of seven announcements valued at Rs 1.5 lakh crore were made. These included Food Micro enterprises (Rs 10,000 crore), PradhanMantriMatsyaSampadaYojana (Rs 20,000 crore), TOP to TOTAL: Operation Greens (Rs 500 crore), Agri Infrastructure Fund (Rs 1 lakh crore), Animal Husbandry Infrastructure Development Fund (Rs 15,000 crore), Promotion of Herbal Cultivation (Rs 4,000 crore) and Beekeeping Initiative (Rs 500 crore).

On Day 4 and 5, announcements worth Rs 48,100 crore were made that included Viability Gap Funding (Rs 8,100 crore) and Additional MGNREGS allocation (Rs 40,000 crore).

In terms of reform measures, on Day 4, the Finance Minister outlined the new horizons of growth in the industrial and infrastructure space with focus on upgrade of industrial infrastructure, introduction of commercial mining in the coal sector, self reliance in defence production through ‘Make in India’. The government also focused on developing world class aviation infrastructure, tariff reform policy for power sector, privatisation of discoms in UTs, boosting private sector investment in social infrastructure sector, private participation in space activities and atomic energy related reforms. More so, there was an effort for inclusive infrastructure development to kick start the capex cycle in the medium to long term.

On Day 5, some additional reform measures were announced relating to further enhancement of Ease of Doing business through IBC related steps. These include minimum threshold to initiate insolvency proceedings raised to Rs 1 crore to insulate MSMEs, Special insolvency resolution framework for MSMEs under Section 240A of the Code, Suspension of fresh initiation of insolvency proceedings up to one year depending upon the pandemic situation, Empowering Central Government to exclude Covid-19 related debt from the definition of ‘default’ under the Code for the purpose of triggering insolvency proceedings. Also, it was announced that there will be Decriminalization of Companies Act violations involving minor technical and procedural defaults, Majority of the compoundable offences sections to be shifted to internal adjudication mechanism (IAM). NirmalaSitharaman mentioned the government will announce a new policy whereby list of strategic sectors requiring presence of PSEs in public interest will be notified. Lastly, Centre has increased borrowing limits of States from 3% to 5%, for 2020-21 only.

What Is Great

MSME, NBFC funding: “The policy has been crafted largely around liquidity needs of employees, MSME and NBFCs. Collateral free loans for MSMEs with a full credit guarantee by the government will be highly fruitful. Likewise for the Rs 30,000 croreinfusion in debt papers of NBFCs. The fund-of-fund concept for MSMEs is also a step in the right direction, but it will take a few months to be implemented. Hence, we believe it will have more of medium-term implications,” said Amar Ambani, senior president and head of research (institutional equities), YES Securities.

The credit guarantee provision helps. The 100 per cent credit guarantee cover on principal plus interest to banks and NBFCs on incremental loan to MSME segment will help channelize the credit flow. The sovereign guarantee and one-year moratorium on principal repayment will enable MSME to tide over the current crisis, and provide a lifeline to banks and NBFCs on their Rs 18 lakh crore loan exposure to MSME segment, which otherwise would have been on the risk of becoming delinquent. “We see this as positive for banks/ NBFCs having sizable exposure to SMEs, as it will reduce asset quality risk in SME segment. Positive for banks like DCB Bank, Federal Bank, City Union Bank, etc., and NBFCs like Shriram City, Shriram Transport Finance, Cholamandalam Investment and Finance and Magma, as they have large part of the book qualified as SME sector lending,” says Manish Agarwalla and PradeepAgrawalof  PhillipCapital (India).

Middle income housing sop: In a big move, the government has announced the one-year extension of the CLSS scheme up to March 2021. This will help push demand for affordable housing. The extension of the PMAY Credit Linked Subsidy Scheme (CLSS) till March 2021 supported by an allocation of Rs 70,000 crore for interest subsidy on home loans for mid income borrowers (Rs 6-18 lakhs per annum) is expected to revive the demand for affordable housing in the current year. This should provide some relief to the residential real estate sector and improve their cash flows in the second half of FY21. However, the administration of the scheme needs to be made efficient for genuine buyers to avail the scheme,” says SumanChowdhury, chief analytical officer, Acuité Ratings and Research.

There are positive side-effects of the CLSS as well. Ever since its implementation in 2017, the CLSS scheme has already benefitted over 3.3 lakh families. Its extension will further aid many more families to avail of housing under this scheme. As a ripple effect of increased demand for affordable housing, it will positively push demand for raw materials like cement, steel, transport and other construction materials,” says AnujPuri, chairman, ANAROCK Property Consultants.

Additional MGNREGS allocation: The Government has now allocated an additional Rs 40,000 crore under MGNREGS. This, it hopes, will help generate nearly 300 crore person days in total. The aim is to address need for more work including returning migrant workers in Monsoon season as well, creation of larger number of durable and livelihood assets. “The additional boost of Rs 40,000 crore towards MGNREGS above Budgetary estimate will help provide work to the those, who have returned to their homes and also support rural demand,” says FICCI.

Fresh PSE/PSU policy in the works: The government has said it will announce a new Public Sector Enterprise (PSE) policy whereby a list of strategic sectors requiring presence of PSEs in public interest will be notified. In strategic sectors, at least one enterprise will remain in the public sector, but private sector will also be allowed. In other sectors, PSEs will be privatized (timing to be based on feasibility, etc) To minimize wasteful administrative costs, number of enterprises in strategic sectors will ordinarily be only one to four; others will be privatized/ merged/ brought under holding companies.

“In the last many years, a lot of the taxpayers’ money has gone into bailing out the public-sector enterprises with a very low return on the capital. This move towards  privatization of the non-strategic PSUs will help the government harness resources at a time where it is significantly stretched due to the fall in GDP numbers on account of the Covid pandemic. We look forward to swift translation of these positive intents into action,” says Sanjay Kumar, CEO & MD, Elior India.

The policy regarding public sector enterprises (PSEs) should be finalized in consultation with the states since there are a large number of state level PSEs. There are in all 257 central PSEs (CPSEs) of which 184 were profit-making enterprises.

Capital market steps: The government has announced direct listing of securities by Indian public companies in permissible foreign jurisdictions. YashAshar, partner & head (capital markets), Cyril AmarchandMangaldas said: “The announcement to permit companies to list shares outside India is a welcome step given the urgent need for capital for several Indian companies.”

While listed companies could access international markets through the issue of depository receipts, now unlisted companies will also directly be able to access equity capital in international markets.

“The framework for listing overseas should be clear, with light compliance requirements in India (as these companies would be regulated in the country they are listed in) and necessary clarifications should be issued to ensure that this product is also tax efficient. This would ensure its utilisation by Indian companies,” added Ashar.

What Isn’t That Great

Measures unlinked to pandemic: “The government’s ‘Atmanirbhar Bharat’ package, elaborated by the Finance Minister over the five days, is a mix of many easy loan schemes, a slew of long-awaited policy reforms across sectors and a little bit of actual money spent by the govt (Rs 2 lakh crore or 102bps of GDP hit in FY21),” says Sunil Tirumalai, head of research and strategist, Emkay Global Financial Service.

The ‘10% of GDP stimulus’ and the reform announcements are worth grabbing international headlines. “However, it is not clear that how many of these reforms are actually linked to the ongoing pandemic (they could have been announced any time). In fact, we are not sure about the timeline of implementation of many of the reforms (though the FM alluded to ‘ordinances’ in a few places),” notes Tirumalai.

The immediate need for income support and the real economic stimulus are still outstanding issues yet to be satisfactorily resolved. “...the overall package is a disappointment for expectations of a revival of demand in the economy, and for sectors that are stressed due to the lockdowns,” Tirumalai pointed out.

Old wine in new bottle: The overall stimulus package amounted to Rs 20,97,053crore, that is, nearly 10 per cent of FY21 GDP. However, it is to be financed only to a limited extent by additional budgetary resources which amount to 10 per cent of the overall package. About five per cent of the package was already provided in the FY21 budget. The balance of 85 per cent relates primarily to RBI, Banks and NBFCs and other institutions.

“Only about 10 per cent of this stimulus can be traced as direct additional budgetary cost to the central exchequer. Nearly five per cent of the stimulus relates to already budgeted expenditures. The rest of the stimulus primarily pertains to RBI’s liquidity enhancement measures, government’s credit guarantee programs and insurance schemes,” says Dr DK Srivastava, chief policy advisor, EY India.

Bold land, labour decisions lacking: On the fourth day of announcements detailing the measures for easing economic hardships triggered by the Covid 19 pandemic, the Finance Minister announced structural reform measures aimed at helping various growth sectors. The FM said 8 sectors have been identified where structural reforms will be brought in. They are coal, minerals, defence production, airports and airspace management, MRO, power distribution of companies in UTs, space and atomic energy.

“These are good measures, but the market is awaiting bold reforms in the areas of production, like land and labour. The need of the hour is to take these bold decisions, and capitalise on the opportunity of garnering a good share of shift in manufacturing base from China. Radical reforms in land, labour and tax laws will be a key contributor to the success of  ‘Make in India’ policy,” says AishvaryaDadheech, fund manager, Ambit Asset Management.

The writer is a journalist with 14 years of experience


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