Much ado about nothing

Faced with a steep decline in its revenue and increase in expenditure commitment, the Modi Government has opted for a package which is dependent on loans

After a long wait of about seven weeks, since the nationwide lockdown began on March 25, Prime Minister Narendra Modi announced  the ‘Atmanirbhar Bharat Abhiyan’, a special package of Rs 20,00,000 crore, about 10 per cent of the Gross Domestic Product (GDP), to revive the economy. Finance Minister Nirmala Sitharaman unveiled the details in five tranches during press conferences held between May 13 and 17. The package aims at giving relief to all strata of society impacted by the sudden stoppage of economic activities viz. farmers, workers, migrant labourers, micro, small and medium enterprises (MSMEs), vendors, small merchants, self-employed people, the middle class and so on. Given its mega size, an immediate question that comes to mind is whether all the components add up to Rs 20,00,000 crore?

The PM Garib Kalyan Yojna (PM-GKY) unveiled on March 26, that focussed mostly on food and other bare minimum needs, offered  support of Rs 1,70,000 crore. Besides, the announcements by the Reserve Bank of India (RBI) Governor, Shaktikanta Das on March 27 and April 17, together provide a liquidity injection of about Rs 8,00,000 crore. These add up to Rs 9,70,000 crore and are included in the mega package total of about Rs 21,00,000 crore (as informed by the FM in her press conference on May 17).

The balance Rs 11,30,000 crore focusses mostly on MSMEs, NBFCs, power distribution companies, migrant labour, agricultural credit and lower middle class, agriculture infrastructure and farm reforms, structural reforms in coal, minerals, civil aviation, defence and MGNREGA, health and State Governments’ resources and public sector reforms.

Taking the total of about 40 crore workers in the informal sector, Rs 21,00,000 crore works out to Rs 52,500 per worker or about Rs 17,500 per month (assuming a three-month lockdown). The amount is nearly four times the national minimum wage for an informal worker, which is Rs 4,550 per month (Rs 175 per day and 26 working days).

This back of the envelope calculation is intended to show what a mega package such as this can do; provided the money is actually made available to the beneficiaries. But where is it? For a farm household in which a woman (also head of the family) is a Jan Dhan (JD) account holder, has a ration card, gas connection in her name and a job under MGNREGA, the total benefit comes to Rs 3,055 per month. This includes the value of 25 kg rice (for a family of five people at five kg per person) at Rs 35 per kg, plus one kg pulse at Rs 80 per kg or Rs 955; Rs 500 ex-gratia in JD account; Rs 500 value of subsidised gas cylinder; Rs 600 hike in wages under MGNREGA and Rs 500 under PM-KISAN (Rs 2,000 being one of the three lots of four months each in a year, pro-rata monthly amount is taken).

Thus, even for a family blessed with access to all the schemes, the  amount is just about two-third of the minimum wage of Rs 4,550. Further, considering that the number of beneficiaries under each scheme varies: 80 crore under the National Food Security Act; 20 crore under JD; 8.3 crore Women Ujjawala beneficiaries; PM-KISAN 8.69 crore and  MGNREGA five crore, it is inconceivable that all those impacted by the lockdown would get anywhere near this amount. The workers in the informal sector who can’t avail of PM-KISAN, JD and Women Ujjawala would get at the most about Rs 1,500.

However, the Government argues that the prime focus of its package is to enable the enterprises where workers are employed or those who are self-employed to resume operations which in turn, will generate jobs and increase income. It is arranging fresh loans at lower interest, collateral-free, backed by sovereign guarantee (either for full amount or partial). It is giving such enterprises relief from servicing of existing loans, their treatment as non-performing assets (NPAs) and initiation of proceedings under the Insolvency and Bankruptcy Code (IBC). Additionally, it is giving tax incentives (such as 25 per cent less tax deduction from various payments) to leave more cash with people.

None of the above measures can substitute cash in the hands of the millions of workers whose income source has been completely smashed for now. Team Modi is trying to rebuild this very source by arranging loans at concessional rates. But in the present highly-excruciating  circumstances, when Covid–19 is not letting factories and businesses to reopen, preventing markets from reopening and blocking consumers’ reach to the market, neither will there be an increase in supply nor will demand materialise (this won’t happen even if the Government puts enough cash in the hands of the people).

In this backdrop, none of the mechanisms contemplated by the Government will work. To get a sense of this, let us look at the following: The Centre is goading banks to give collateral-free loan worth Rs 3,00,000 crore to MSMEs for three years (borrowers with up to Rs 25 crore outstanding and Rs 100 crore turnover are eligible) to benefit 45,00,000 units. They also get one year moratorium on repayment. However, considering that these firms already owe Rs 15,00,000 crore, the banks face huge risk and may not lend. The Government’s promise of indemnifying them in the event of default won’t instill confidence in the banks.

Look at the loan of Rs 75,000 crore, the Government wants to be given to non-bank finance companies (NBFC), housing finance companies (HFCs), micro finance institutions (MFIs). Of this, Rs 30,000 crore is fully covered by sovereign guarantee and for the remaining Rs 45,000 crore, it has given a guarantee cover only to the extent of 20 per cent. Put simply, for 80 per cent of the amount Rs 36,000 crore, the banks will be left in the lurch from the word go.

Consider the special loan of Rs 90,000 crore it wants Rural Electrification Corporation (REC), Power Finance Corporation (PFC) — both central undertakings — to give to discoms. It is well-known that the latter are bankrupt and are just not in a position to pay back. Yet, any pressure on REC/PFC to lend to discoms will be at the cost of creating NPAs on the former’s books.

Likewise, it is asking the National Bank for Agriculture and Rural Development (NABARD) to give Rs 30,000 crore additional emergency working capital (upfront) for crop loans in addition to Rs 90,000 crore that is already being given for such financing. Being a directive from the Government, it may have no other option but to disburse funds, but the risk of the loan becoming an NPA is real. The Government also wants to help street vendors by arranging bank credit facility for initial working capital of up to Rs 10,000 (expected to benefit five million vendors) and micro-enterprises that avail loans up to Rs 50,000 under the MUDRA Shishu scheme by giving two per cent interest subvention for 12 months to the borrower. These crutches will work but only if the vendors/enterprises get a chance to resume their normal activities.

The conditions created by Covid– 19 are rendering all efforts to pump more credit/liquidity into the economy infructuous. This may also be seen from the fact that many businesses/enterprises have got loan sanctions worth hundreds of thousands of crores but are unwilling to actually draw the funds. This has led to an anomalous situation whereby despite the RBI making plenty of liquidity available with banks, borrowers are not coming forward to avail the loans. This has forced banks to keep money with the RBI under the so called “reverse repo” window earning 3.75 per cent.

Currently, the amount lying unused in this window is a gargantuan about Rs 8,50,000 crore. Sitharaman is reported to have pleaded with banks to release this money for spurring economic activity. But, what do you do when the enterprises themselves are not coming forward.

Faced with a steep decline in its revenue and increase in expenditure commitment, the Modi Government has opted for a package which is dependent preponderantly on loans. This helps in preventing immediate fiscal stress. It could have done more by increasing direct cash support beyond what it has given. But, there is no guarantee that this by itself would have helped in spurring demand. There is dire need for all stakeholders viz. industries, businesses and most importantly the public to strictly follow “social distancing.” This is the only way the virus can be reined in, by paving the way for revival of the economy, restoration of jobs and incomes.

(The writer is a New Delhi-based policy analyst)