In a span of less than a week, there have been three sets of official announcements enumerating the measures to alleviate the problems faced by industries, businesses and workers due to the economic disruption caused by Covid – 19. The first two were made by the Finance Minister [FM], Nirmala Sitharaman on March 24 and 26, 2020 and the third by the Governor, Reserve Bank of India [RBI], Shaktikanta Das on March 27, 2020.
On March 24, 2020, FM announced reliefs for the industries and businesses, which are largely ‘procedural’. These include extending the date for filing returns [income-tax, GST, customs, excise and statutory filings under Companies Act], reducing interest chargeable on delayed payments, exemption from penalty, increasing threshold of filing under the Insolvency and Bankruptcy Code [IBC] etc. The firms have been given leeway for three months up to June 30, 2020 to complete various filings and submissions etc.
On March 26, 2020, Sitharaman announced PM Gareeb Kalyan Scheme [PMGKS] aimed at providing immediate assistance to millions of poor. The scheme entails total expenditure commitment of Rs 170,000 crore. It proclaims relief in about a dozen areas.
The payment of first installment of Rs 2,000/- to farmers under PM KISAN in first week of April is merely a rehash of what is already being done. The relief from welfare fund for building & construction laborers [it has around Rs 31,000 crore] is not quantified. The increase in collateral free loan limit for Women self-help groups [SHGs] under Deen Dayal National Livelihood Mission [DDNLM] is not a cash transfer or grant.
The 24% contribution by GOI to EPF for 3 months is hamstrung by a rider that says ‘entity should have 90% of its employees earning less than Rs 15,000/- per month’. Even if the number is 89%, it won’t be eligible. The amendment to EPFO regulation [enabling workers draw up to 75% for their contingency expenditure as non-refundable advance or three months of wages in advance whichever is less] merely allows them to withdraw their own money!
The areas promising tangible benefit include giving 5 kg of rice or wheat per person per month for ‘free’ to around 80 crore people through the public distribution system [PDS] plus one kg of preferred and region specific choice of pulse per household; Ex gratia of Rs 500 per month to Women Jan Dhan account holders; free gas cylinders to Women Ujjawala sheme beneficiaries and increase of Rs 20/- in wage rate of workers under MNREGA. For a family of 5 headed by woman Jan Dhan account holder, these will add up to benefit of about Rs 2500/- per month or Rs 7500/- in 3 months.
This is nearly half of the income loss Rs 4550 per month [national minimum wage of an informal worker at Rs 175 per day and 26 working days in a month] if she doesn’t get to work – a scenario in the current lock-down. Besides, the scheme leaves out tens of millions workers, vendors, hawkers etc including those who have taken loans under the much trumpeted MUDRA yojna.
India’s working population is about 40 crore. Of this, 94 percent or 37.6 crore are in the informal sector. The compensation to them @Rs 4550/- [call it direct income support] will require about Rs 170,000 crore per month or Rs 510,000 crore for 3 months. Clearly, what the FM has offered i.e. Rs 170,000 crore is just about 1/3rd. Even this limited package will severely impact government’s fiscal position.
In the budget for 2020-21, FM had budgeted fiscal deficit [FD] at 3.5%. This was based on tax revenue of Rs 1575,000 crore – an increase of 31% over the likely actual for 2019-20 [Rs 1200,000 crore] and proceeds of disinvestment in PSUs at Rs 210,000 crore. Already, these targets were inflated; post – Corana crisis, these look like day dreaming. Moreover, 3.5% does not capture deferred subsidy payments [DSPs] and extra-budgetary resources [EBRs]. Making adjustment for all these factors, FD will be at least 7%. Add to this, expenditure commitments under PMGKS, it will be close to 8%.
In this backdrop, a suggestion by some experts to relax FD target say by 1% is amusing. Another idea to increase central excise duty [CED] on petrol and diesel [already, the government has taken parliament’s nod for increase in duty by up to Rs 8 per litre each] may look attractive when seen in the backdrop of crude oil plummeting to below US 30 per barrel. But, there is need to introspect as to how far it can go on milching this source of revenue all the more when the tax component in price at the pump is over 50%!
That apart, even if all of the leeway authorized by the parliament is utilized to increase CED by Rs 8 per litre, all that the government would garner – after devolution of 41% to states [as per 15th Finance Commission recommendation] – is a little over Rs 60,000 crore [@Rs 13,000 crore for every rupee per litre: 13000x8x0.59]. That is too small to make any dent on the fiscal void.
The measures announced by RBI governor on March 27, 2020 include reduction in policy rate [interest rate charged by the apex bank on loans given to banks] by 75 basis points to 4.4%; 3-month moratorium on payment of installments in respect of all term loans outstanding on March 31, 2020; relaxation in the norms for cash credit and working capital limits; reduction in cash reserve ratio [CRR] [portion of deposits, banks are required to keep with RBI] by 100 basis points to 3%; auction of targeted long term repo operations of 3-year tenor for total amount Rs 1,00,000 crore at floating rate; accommodation under Marginal Standing Facility [MSF] to be increased from 2% of SLR [statutory liquidity ratio] to 3% with immediate effect till June 30, 2020.
While, the last three measures will inject a total of Rs 374,000 crore in the country’s financial system, others seek to reduce the cost of capital and ease the stress of loan repayments. However, in a situation of demand destruction, economic activity coming to grinding halt and weak sentiment, it is anybody’s guess whether this massive dose of liquidity and rate reduction will help arrest the slide.
To sum up, while we may defeat Corona, the scar it leaves will continue to haunt the economy for a couple of years.