PM Narendra Modi only gave limited details about the INR 20 lakh crores stimulus package in his address to the nation earlier this week. The finance minister Nirmala Sitharam has given additional details to make the entire policy much clearer. The entire amount also includes extra expenditures, loans, loan guarantees, and other commitments by the government as well as the RBI.
The medium to long term impact of adding a total of 10 percentage points to the fiscal deficit would not have been pretty at all. The government would then have had to print some amounts of money, which would then naturally raise the cash in circulation by a really large percentage- perhaps about 25-30%.
The impact that the package will have on the fiscal deficit situation of the country is anyone’s guess. However, there are still a lot of unknowns. We do not yet know the extent of the fallout from the COVID 19 on tax revenues, as well as what the re-arrangement of the originally budgeted expenditures would be, given how many budgeted allocations for expenditure would have gone unspent in the wake of the coronavirus pandemic.
More than the headline figure, what matters more is the quality of the package. The pandemic is no ordinary shock to the economy. It has hit both demand and supply simultaneously. Thus, the shock on both sides needs to be neutralized to go far. What further adds to the complication is the fact that the supply shocks have impacted different sectors and different enterprises very differently. This, of course, makes the job of the policymaker a very difficult one.
Keeping the above problems and factors in mind, the first installment of the package has been announced by the finance minister. This will be an important step in keeping the economy afloat, while also fighting against the continuing and ever raging war; especially in states and areas where economic activity is at its peak.
Note how the mission right now is to keep the economy afloat and not to revive it, given the nature of the problem at hand. True revival will take place only and only when workers can reach the machinery and start manufacturing. As long as workers are held apart from the machinery, meaningful revival cannot happen.
The current package comes built on INR 1.7 trillion government package that was announced in March and the series of actions that followed from the end of the RBI. Whatever announcements have been made so far constitute the first part of the overall package, and focus on the availability of credit to enterprises, especially those in the MSME category (micro, small and medium enterprise). This will help enterprises of this category manage to stay afloat until the economy gets into a genuine revival mode.
As far as MSMEs are concerned, the package has decided to allocate INR 3 trillion for collateral-free loans. These loans have four-year tenure with no payments due for a year. INR 20,000 crores have also been allocated for subordinate debt to help out the stressed MSMEs. Further, INR 50,000 crores will be infused in equity funds for MSMEs.
These are all substantial amounts, and their disbursal will be a huge challenge.
Another major component of the package focuses on NBFCs, HFCs, and MFIs. The government has proposed to launch an INR 30,000 crores special liquidity scheme for these companies, and the funds can be used to buy debt issued by NBCs, HFCs, and MFIs. This measure will work in tandem with the actions of RBI to enhance liquidity.
The government also proposed to give partial credit guarantee of loans worth INR 45,000 crores to NBFs and HFCs who will then offer credit to MSMEs. Under the scheme, the government will bear the first 20% of the loss that is incurred on such loans. This will help to convert some of the existing funds into actual liquidity.
Power distribution companies have always been a problematic sector, and their woes have only become much worse during the crisis because of a sharp decline in their revenue. The package will infuse INR 90,000 crores in liquidity into these companies, and these funds come in the form of loans that will be guaranteed by the state governments.
Other than measures that are aiming at mitigating supply-side shocks, the finance minister has also included some demand-side measures. For example, the rates of TDS and TCS will be cut by 25% for the remainder of the current financial year. Additionally, the due date for the collection for income tax for the fiscal year 2020 has been extended to November 30, 2020.
The package also contains some other modest policy changes. For instance, changing the very definition of MSMEs is being suggested, which will then allow for larger enterprises in each category. Moreover, this will allow for the enterprises in each category to grow larger without them fearing that they would lose out on the benefits provided in the category.
Foreign companies will also be excluded from bidding from government contracts of INR 200 crores or less. This directly means more room for MSMEs.
These measures form a part of the first phase of the overall package, with a clear-cut focus on MSMEs. We are yet to see what the next installments bring. The larger corporations are a source of larger outputs, and they do require interim support as well. The measures that the government initiates for them remain for a discussion for another day.