Sitharaman's first tranche of Rs. 20 lakh crore Covid package aimed at giving jobs
Economic Times, May 14 2020
Even from the limited details that the Prime Minister spelt out in his speech on the 20 trillion-rupee stimulus package, it was clear that this headline figure would be reached by adding apples and oranges. The details now provided by the Finance Minister make this explicit. Not all of 20 trillion rupees constitute extra fiscal expenditure. They include extra expenditures, loans, loan guarantees and other forms of commitments by the government and the Reserve Bank of India.
This is just as well. Medium to long-term impact of adding 10 percentage points to fiscal deficit would not have been pretty. The government would have had to print massive sums of money raising cash in circulation by a very large percentage, perhaps as much as 25 to 30%. How much impact the package will have on fiscal deficit is anybody’s guess. There are far too many unknowns: we do not know yet the extent of fall out from Covid-19 on tax revenues as well as the rejig of the originally budgeted expenditures. Surely, many of the budgeted allocations for expenditure would also go unspent in the wake of Covid-19.
More than the headline figure of 20 trillion rupees what matters is the quality of package. Covid-19 has been no ordinary shock to the economy. It hit both demand and supply severely and simultaneously. Therefore neutralizing one shock without the other cannot go far. Adding to this complication is the fact that supply shocks have impacted different sectors and different enterprises differently. That makes the task of the policy maker complicated to say the least.
Keeping these factors in view, the package of measures announced by the Finance Minister is an important major step towards keeping the economy afloat while the fight against Covid-19 continues, especially in states and districts that constitute the main hubs of economic activity. I use the term “keeping afloat” instead of “revive” because at the moment that is the main challenge facing the economy. True revival can only happen once the hands reach the machines. As long as health concerns keep workers away from their work, meaningful revival cannot happen.
Building on the original 1.7-trillion-rupee government package and a series of actions by the RBI, the latest package, which is Part I of the overall package, focuses on the availability of credit to enterprises, especially in MSME category, so that they remain afloat till the economy gets into genuine revival mode. For MSMEs, it allocates 3 trillion rupees for collateral-free loans. The loans have a 4-year tenor with no payments due for one year. It also allocates 20,000 crore rupees for subordinate debt aimed at helping currently stressed MSMEs. There is a further infusion of 50,000 crore rupees in equity funds for MSMEs. For now, these are substantial sums. The challenge will be their disbursal.
Another major component of the package focuses on non-bank-finance companies (NBFCs), Housing Finance Companies (HFCs) and Microfinance Institutions (MFIs). The government proposes to launch a 30,000 crore-rupee special liquidity scheme for these companies. The funds will be used to buy debt issued by NBCs, HFCs and MFIs. The measure will supplement the actions by the RBI to enhance liquidity.