Decoding the economic stimulus – Cover Story News

It is often said that one should never waste a good crisis, since every crisis also offers an opportunity for a creative response. For the government, the COVID-19 pandemic, disastrous as it may be, has also presented an opportunity to implement some bold economic reforms. And Prime Minister Narendra Modi did seem to grab that opportunity on the 49th day of the nationwide lockdown. But the question remains: will the Rs 20 lakh crore stimulus put India back on a growth and development trajectory, or will the prime minister’s ‘Aatma Nirbhar Bharat’ pitch, of taking India towards a robust self-reliance, prove to be rose-tinted optimism?

On May 12, the prime minister announced a stimulus package of Rs 20 lakh crore, which had two key objectives, to provide immediate succour to individuals and firms impacted by the lockdown, and to prepare Indian companies, specifically those in the micro, small and medium enterprises (MSME) sector, to take advantage of new manufacturing opportunities in the post-pandemic world. The prime minister said that the stimulus package amounted to 10 per cent of India’s Rs 200 lakh crore economy, but admitted that it included recent monetary measures taken by the Reserve Bank of India (RBI) to improve liquidity. “This package will give a new impetus to the development journey of the country in 2020, and a new direction to the self-reliant India campaign,” Modi said in his fifth address to the nation since the lockdown was first announced. At roughly $266 billion, on paper, India’s stimulus package is one of the largest in the world after the US’s (13 per cent of its GDP) and Japan’s (21 per cent of its GDP).

While the prime minister left it to finance minister Nirmala Sitharaman to spell out the details, the larger message was clear. It was time to rewrite the rules of the game for the post-COVID-19 world. The strategy to make India ‘self-reliant’ rests on five pillars. The first point of intervention is the economy, the government has vowed to bring about structural changes in land and labour laws and regulations, as well as to improve liquidity to kindle growth. Stuck as it was at around a 5 per cent growth rate even before the lockdown, the economy will now, in all likelihood, see a contraction in the short term. It remains to be seen how the government first gets Indian companies back on their feet, before chiselling their competitiveness to make and market products for India and the world more effectively than before. The other four pillars of the government’s strategy involve developing efficient, world-class infrastructure, developing technology-driven systems, making use of the country’s vibrant demography and boosting domestic demand.


On May 17, the day the third phase of the Great Lockdown was to end, India would have completed a 54-day suspension of most economic activity. This has been touted as the most stringent pandemic response by any of the world’s large economies. While the healthcare preparations made in this time have been essential, they have come at a grievous economic cost. Even the most optimistic outlook for India’s growth in the current fiscal stands at just 1.9 per cent, as forecast by the International Monetary Fund, but it could even dip into negative territory, as predicted by McKinsey and Nomura. The Centre for Monitoring Indian Economy estimates that at least 122 million people lost their jobs in April 2020. Many firms in the hotels, airlines, automotives, construction, real estate and textiles sectors have seen their businesses wiped out entirely.

The MSME sector, which has 60 million units, contributes about 29 per cent to India’s GDP and employs about 120 million, was one of the worst-hit by the pandemic and the lockdown that followed. On May 13, Sitharaman announced 15 different initiatives, of which six were targeted at the MSME sector. These included Rs 3 lakh crore worth of collateral-free loans, 100 per cent credit guaranteed, which could benefit 4.5 million units; Rs 20,000 crore in subordinate debt for stressed MSMEs, which could benefit 200,000 firms, including those with outstanding loans that are classified as non-performing assets or stressed, and a Rs 50,000 crore equity infusion for MSMEs through a fund of funds, set up with Rs 10,000 crore corpus, among others (see Breaking It Down).

One of the long-standing concerns of the MSME sector has been the lack of credit. Often, banks seemed to shy away from offering loans to firms in this sector for fear of defaults. One way to address this issue was for the government to stand as a guarantor for loans taken by MSMEs. This has been addressed to some extent in the stimulus. For standard MSMEs (those that have been servicing their loans so far), new loans up to 20 per cent of the current outstanding credit will be fully back-stopped by the government. This means that if there is a default by the MSME unit, the government will pay the bank. “We expect this to drive immediate credit creation, as guarantees are available only for loans extended in the next six months, lenders have zero risk and the borrowers are most likely stressed and would want these funds,” says Neelkanth Mishra, co-head of Equity Strategy for Asia Pacific and Equity Strategist, India, for Credit Suisse. It is possible that firms will use these loans to pay interest or cover losses, but that, in a way, is the purpose of the scheme. The government would then absorb the losses upfront rather than wait for them to default and go into bankruptcy proceedings.

Given the employment and output it generates, reviving this sector is essential to any economic recovery. Union minister for MSMEs, Nitin Gadkari, says that the measures announced by the finance minister “are essential for [the sector’s] survival”, adding: “Even before COVID-19, there were issues, [but] these measures will make India a super power economy. In six months, you will see the difference (see interview on page 32).

Madan Sabnavis, chief economist at Care Ratings, says the measures announced for MSMEs are ‘positive’. “While the Rs 3 lakh crore [of loans] would have flowed in the normal course from banks, the advantage here is in terms of the costs being capped, terms being fixed with moratorium and, more importantly, the loans being guaranteed by the government,” he says. He also says that the new criteria to classify firms as micro, small and medium enterprises are a positive step that will encourage growth: “At present, [firms] have an incentive to remain small.”

However, industry leaders are not as optimistic. Anil Bhardwaj, secretary general of the Federation of Indian Micro, Small and Medium Enterprises, says he is disappointed by the measures announced thus far, saying that the industry’s most critical demands have been ignored. He points out that the need of the hour is support in paying salaries and interest on existing loans, not access to fresh credit. “While the industry is shut, we still have to pay interest to banks and salaries to workers,” says Bhardwaj. “I won’t take a loan to pay my liabilities. I don’t get any support for my current liabilities [from the finance minister’s package],” adding, “many other countries have given cash grants [to industries].”

MSME minister Gadkari disagrees with that point of view, saying that the EPF support will free up capital for salaries and operating expenses. On May 13, finance minister Sitharaman had said that the extension of EPF support till August would benefit about 7.2 million employees, freeing up about Rs 2,500 crore, while the reduction in statutory EPF contributions would mean Rs 6,750 crore of increased liquidity for employers over three months.

The challenge of the new schemes will be in delivery. The whole process of passing on credit to MSMEs will get delayed if banks raise hurdles. Moreover, since only a fraction of MSMEs are listed with EPFO, the EPF relief would not necessarily address the current pain points of MSMEs, specifically in paying salaries, interest on loans and utility bills. Although MSMEs had been demanding a bailout package, through the credit guarantee scheme, the government has taken over the credit risk of MSMEs, which might work out better for them in the long term. However, the flip side of the scheme is that a 100 per cent guarantee removes the incentive for the borrower to repay and for the lender to do the necessary due diligence.

Yet another set of announcements made by the finance minister was regarding providing a Rs 30,000 crore special liquidity scheme for non-banking financial companies (NBFCs), housing finance companies and microfinance institutions (MFIs), a Rs 45,000 crore partial credit guarantee scheme for the liabilities of NBFCs and MFIs, and a Rs 90,000 crore liquidity injection for power distribution companies (discoms), among others. Sanjiv Bajaj, chairman and MD of Bajaj Finserv, says the measures will particularly help smaller NBFCs. The Rs 30,000 crore special liquidity scheme for NBFCs, housing finance companies and MFIs enables these institutions to borrow more from the market, increasing downstream credit. And as this is a guarantee, there is no major impact on the government’s fiscal deficit. However, he points out a looming problem: “We will need to bring back migrant workers to get MSMEs started.” Mishra, however, does not believe that the two schemes together, aiming to provide Rs 75,000 crore of liquidity to NBFCs, will be very successful. The reason for this is that the special purpose vehicle that is to provide liquidity to NBFCs provides funds for three months at a time, and while this may be enough to prevent NBFCs from defaulting, it may not be sufficient to help them grow in the long term.

Firms in the real estate sector have also been given some reprieve. While the relaxation of compliance timelines under RERA gives breathing space to developers whose projects have been frozen by the lockdown, the one-year extension of the credit-linked subsidy scheme (CLSS), which subsidises home loans taken by urban residents below an income threshold, is expected to boost demand for affordable housing. “The extension of CLSS should see demand for another 250,000 affordable homes,” says Niranjan Hira­nandani, MD of the Hiranandani Group. “This should create demand for construction material and provide jobs.”

Illustration by Tanmoy Chakraborthy


The devil, as always, is in the details. One instant red flag raised by analysts cynical of the stimulus package is that the actual additional stimulus will be much less than Rs 20 lakh crore, and there are varying estimates of how much the government will actually spend. For instance, Barclays has said earlier announcements by the finance minister and the RBI, the Rs 1.7 lakh crore safety net and the liquidity injection by the RBI announced in March, account for Rs 9 lakh crore, leaving Rs 11 lakh crore of new announcements. JP Morgan estimates that earlier announcements total Rs 6.7 lakh crore, leaving Rs 13.3 lakh crore. According to Sabnavis, the announcements on May 13 amount to Rs 6 lakh crore, with another Rs 7 lakh crore accounted for by the safety net and the RBI’s moves to increase liquidity. Another economist, not wanting to be named, estimates that of the Rs 6 lakh crore announced on May 13, the government’s actual fiscal cost will be less than Rs 50,000 crore. “This is maximum bang for the buck. This is a package that industry and markets won’t like because it is supply side-focused and everyone wants free money. But now everything is your contingent liability,” he said.

“The fiscal cost of the package to the central exchequer is limited to Rs 16,500 crore (of the Rs 6 lakh crore),” says D.K. Srivastava, policy advisor at EY. “Most of it is from the credit liability scheme, and is not likely to be invoked in the current year.” The government can also up its borrowing. It has already raised its borrowing target for the current financial year to Rs 12 lakh crore from Rs 7.8 lakh crore estimated in the budget, which would take the fiscal deficit from 3.5 per cent to 5.5 per cent. “They have not announced any major fiscal stimulus; they have room to do so,” adds Srivastava. “The direction that the government is taking is okay, but the size of intervention is not okay.”

There has also been criticism of the government’s decision to announce both its fiscal interventions and the RBI’s monetary measures as a single stimulus package. This is because these two mechanisms work in different ways, the former by actual expenditure or a reduction in taxes, and the latter by increasing the supply of credit or money. “[No other country] combines fiscal and monetary policy as one,” says N.R. Bhanumurthy of NIPFP (National Institute of Public Finance and Policy). He estimates that the fiscal stimulus alone would come to about Rs 6-7 lakh crore, or about 3 per cent of GDP. In effect, the government isn’t paying much out of pocket, which suggests three scenarios, either it is constrained by budgetary realities (GST collections are expected to be significantly hit), or it is holding back some ammunition for the future, or both.


Since the beginning of the lockdown, the RBI has taken a number of steps to improve liquidity. One such was permitting banks to offer consumers three-month moratoriums on loan payments, announced on March 27. The central bank has also infused Rs 1.12 lakh crore in liquidity into the banking system through long-term repo operations alone since the start of the lockdown, among other interventions. However, these measures have not been as successful as was hoped for. The increase in liquidity ‘has not led to a commensurate easing in financial constraints or improved access to finance for many businesses’, noted Care Ratings in a report. ‘Banks continue to be risk-averse and credit dispersal remains restrained. The surge in bank funds parked with the RBI (in the reverse repo facility) even at a low rate of return bears testimony to that.’

The RBI’s moratorium scheme has also had mixed results. While announcing its March-quarter results, ICICI Bank stated that 32 per cent of its loan book was under moratorium. For Axis bank, the number was between 25 and 28 per cent. Ratings agency ICRA estimates that about 328 companies from across sectors have applied for moratoriums.

The implementation of the scheme has also seen contention, with several small retail borrowers, microfinance companies and NBFCs complaining that some development financial institutions such as SIDBI, MUDRA, NABARD and a section of public sector banks were discriminatory in extending the scheme.

One reason why banks, despite the increased liquidity, remain averse to lending is the overall uncertainty in the economy. “We are looking to do business, but given the situation we are in, the outlook is uncertain,” says Sanjiv Chadha, MD & CEO of the Bank of Baroda, India’s third-largest public sector bank. “Bank balance sheets are stretched, we are facing issues of asset quality and access to the capital market is limited, we have no choice.”


Even as it addressed the pain across various sectors, the Modi government has declared its ambition of exploiting this disruptive period to set the stage for a more self-reliant and globally competitive Indian industry. The government’s original ‘Make in India’ initiative had flopped, thanks to a barrage of policy delays and bureaucratic hurdles. In a post-COVID-19 world, where countries would be looking inward and possibly raising barriers to trade, the new approach of ‘self-reliance’ may be just what the doctor ordered. “The pandemic is [raising] barriers everywhere,” says Arun Maira, a former member of the Planning Commission. “We need to build for the domestic market.” That plan, he said, hinged on boosting the backbone of our economy, the MSME sector, as China has done.

In her media briefing, Sitharaman clarified that becoming self-reliant did not mean that India would raise barriers to international investors. But there is a clear sense that attracting foreign investment is just not enough. “Just making things easy for large foreign investors doesn’t help grow our economy nor does it help grow jobs in our hinterland,” says Maira. “India should learn from the failure of special economic zones, and build zones completely de-linked from the existing industrial and labour laws, with just 2-3 pages of compliances and self-certification,” says Vinayak Chatterjee, chairman of Feedback Infra. Certain states like Madhya Pradesh, Uttar Pradesh, Rajasthan and Gujarat have already embarked on a revamping of labour laws to make them more attractive for investment.

With the announcement of the stimulus and some of its targeted measures, the government has set the ball rolling on reviving the economy. But much remains to be done. The significant economic damage of the lockdown must be addressed. Rejigging the economy for the post-pandemic world is no less challenging. Planning and announcements will not do the job, from this point on, what will matter is execution and to put real money where the mouth is.

Breaking It down

The targeted relief measures announced by finance minister Nirmala Sitharaman on 13-14 May

Photo by Qamar Sibtain


Measure: Rs 3 lakh crore collateral-free loans for MSMEs, 100% credit guaranteed

Impact: Moratorium on payments and government loan guarantee to benefit 4.5 million units

Measure: Rs 20,000 crore subordinated debt for stressed MSMEs

Impact: To benefit 200,000 MSMEs, including those with loans classified as stressed or as non-performing assets

Measure: Rs 50,000 crore equity infusion for MSMEs through a fund of funds

Impact: Will help MSMEs tide over severe capital shortage

Measure: Reclassification of MSMEs (service & manufacturing)

Micro: investment

Small: investment

Medium: investment

Impact: Growth push; old incentive structure favoured smaller units

Measure: No global firms can bid for government tenders

Impact: More contracts for domestic firms

Measure: Government and central PSEs to pay all MSME dues, about Rs 5 lakh cr, within 45 days

Impact: Improved cash flows and balance sheets for MSMEs


Measure: Rs 30,000 crore special liquidity scheme for NBFCs, housing finance companies and microfinance institutions; investment will be made in both primary and secondary market transactions to buy debt paper of these institutions. A Rs 45,000 crore partial credit guarantee scheme for NBFCs also launched

Impact: Enables these institutions to borrow more from the market, with no direct impact on the government’s fiscal deficit, being only a guarantee


Measure: A Rs 90,000 crore emergency liquidity infusion in power distribution companies

Impact” Discoms can use these funds to pay power generation and transmission companies


Measure: Under the Real Estate Regulatory Act, the COVID-19 crisis will be treated as a ‘force majeure’ event; timelines for statutory compliances extended

Impact: Relief for developers


Measure: Employees’ Provident Fund (EPF) contribution support for firms extended till August. EPF contributions to be reduced from 12% to 10% for 3 months

Impact: Will free up about Rs 2,500 crore and benefit 7.2 million employees; extra liquidity for employers of about Rs 6,750 crore over three months


Food Security

Photo by Qamar Sibtain

On May 15, finance minister Nirmala Sitharaman spelt out the government’s vision for the agriculture sector, new infrastructure, the setting up of clusters of food-processing micro-enterprises across the country, as well as strengthening the network of aggregators, farmer-producer associations, agriculture societies, etc. A fund has been established with a corpus of Rs 1 lakh crore to develop infrastructure like cold-storage chains and post-harvest management systems. Money will also be spent on deepening infrastructure for fisheries and shrimp cultivation and improving livestock for milk and meat production. Another focus is providing support to vegetables, fruits and meat farmers, among the worst-hit by the lockdown. Rs 500 crore will be spent to rebuild supply chains for these products.

The announcements continued the initiatives described on May 14, which included increasing farmers’ access to credit and schemes to improve food security. The coverage of the Kisan Credit Card scheme is to be increased by 25 million farmers, allowing them access to a Rs 2 lakh crore pool of concessional loans, with additional support of Rs 30,000 crore for crop loans via NABARD (the National Bank for Agriculture and Rural Development). On access to food, Sitharaman said ration cards are to become portable, usable anywhere within India. Related developments, like the Food Corporation of India (FCI) fast-tracking the procurement of Rabi crops and changes by states in the procurement ecosystem, are also significant.

The Union agriculture ministry estimates national wheat production at 106.7 million tonnes (MT) this year, of which the FCI will acquire 40.7 MT. The Punjab government has already achieved its wheat procurement target of 13.7 MT. Other states are also on track to achieve their targets, including Madhya Pradesh (10 MT), Haryana (9.5 MT) and Uttar Pradesh (5.5 MT). The Rabi crop is valued at about Rs 7.51 lakh crore, with wheat contributing the largest amount. The FCI is also in the process of acquiring 11.29 MT of the season’s paddy crop. To meet ration-distribution targets, the FCI has been transporting grain across India at a record pace. In the first half of April, average daily transport increased from 80,000 tonnes to 140,000 tonnes. The clearing of the FCI’s stock will also allow rice mills in Punjab and Haryana to start their milling cycles early, by mid-June.

The lockdown has also forced states to develop new methods of procurement, with Punjab, Madhya Pradesh and Haryana significantly increasing the number of procurement centres. Another challenge was the lack of manpower, “making it impossible to do doorstep procurement”, says Gaurav Garg, a procurement agent at Monak mandi in Punjab’s Sangrur. “We [had to] rope in MNREGA workers,” says Vishwajeet Khanna, additional chief secretary in the Punjab government.

Many states also implemented staggered marketing, under which farmers require appointments to visit mandis. Punjab also initially tried limiting how much farmers could transport in a single time slot, while Haryana wanted farmers to pre-register their harvest sizes. These measures were scrapped following protests. “The cap on transport quantity created unnecessary red tape,” says Vijay Kalra, president, Federation of Arthiya Association of Punjab. In end-April/ early May, states like Gujarat, Uttar Pradesh and Madhya Pradesh also opened up their markets to private players, with Karnataka also considering similar changes. This will bring in new competition and hopefully improve the prices farmers receive. Fruit and vegetable farmers, who were hit particularly hard by the lockdown, may find this to be a significant relief.

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