After a long wait of about 7 weeks since the nation-wide lockdown on March 24, 2020, Prime Minister, Narendra Modi announced on May 12, 2020 ‘Atmanirbhar Bharat Abhiyan’, a special economic and comprehensive package of Rs 2000,000 crore, about 10% of gross domestic product [GDP], to revive the economy. The finance minister, Nirmala Sitharaman unveiled the details in 5 tranches during press conferences held on May 13 – 17, 2020.
The package aims at giving relief to all strata of the society impacted by sudden stoppage of economic activities viz. farmers, workers, migrant labor, micro, small and medium enterprises [MSMEs], vendors, small merchants, self-employed, middle class etc. Given its mega size, an immediate question that comes to mind is whether all the components add up to Rs 2000,000 crore?
The PM Garib Kalyan Yojna [PMGKY] unveiled on March 26, 2020 that focused mostly on food and other bare minimum needs offered support of Rs 170,000 crore. Besides, the announcements by Reserve Bank of India [RBI] governor, Shaktikanta Das on March 27, 2020 and April 17, 2020 together provide liquidity injection of about Rs 800,000 crore. These add up to Rs 970,000 crore and are included in the mega package total of about Rs 2100,000 crore [as informed by FM in her press conference on May 17, 2020].
The break-up of the balance Rs 1130,000 crore is: first tranche [focusing mostly on micro, small and medium enterprises (MSMEs), non-banking finance companies (NBFC) and power distribution companies (discoms): Rs 590,000 crore; second tranche [migrant labor, agricultural credit and lower middle class]: Rs 316,000 crore; third tranche [agriculture infrastructure and farm reforms]: Rs 163,000 crore; fourth tranche [structural reforms in coal, minerals, civil aviation, defense]: Rs 58100 crore; fifth tranche [MGNREGA, health and state governments’ resources, pubic sector reforms].
Taking total of about 40 crore workers in the informal sector, Rs 2100,000 crore works out to Rs 52,500/- per worker or about Rs 17,500/- per month [assuming 3 months lockdown]. The amount is nearly 4 times the national minimum wage for an informal worker Rs 4550/- 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 ration card, gas connection in her name and a job under MGNREGA [Mahatma Gandhi National Rural Employment Guarantee Act], the total benefit comes to Rs 3055 per month. This includes the value of 25 kg rice [for a family of 5 persons @ 5 kg per person] @ Rs 35 per kg plus one kg pulse @ Rs 80 per kg or Rs 955/-; Rs 500/- ex-gratia in JD account; Rs 500/- value of subsidized gas cylinder; Rs 600/- hike in wage under MGNREGA and Rs 500/- under PM KISAN [Rs 2,000/- being one of the three lots of 4 months each in a year, pro-rata monthly amount is taken].
Thus, even for a family blessed with the access to all the schemes, the amount is just about 2/3rd of minimum wage Rs 4550/-. Further, considering that the number of beneficiaries under each scheme varies: NFSA [National Food Security Act]: 80 crore; JD: 20 crore; Women Ujjawala: 8.3 crore; PM KISAN: 8.69 crore; MGNREGA: 5 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, Jan Dhan and Women Ujjawala would get at the most about Rs 1500/- and hardly any cash.
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 NPAs [non-performing assets] and initiation of proceedings under the Insolvency and Bankruptcy Code [IBC]. Additionally, it is giving tax incentives [such as 25% less tax deduction from various payments] to leave more cash with public.
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 there will be increase in supply nor the demand will materialize [this won’t happen even if the government puts enough cash in people’s hand].
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:-
It is goading banks to give collateral-free loan worth Rs 300,000 crore to MSMEs for three years [borrowers with up to Rs 25 crore outstanding and Rs 100 crore turnover are eligible] to benefit 4500,000 units. They also get one year moratorium on repayment. However, considering that these firms already owe a huge Rs 1500,000 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.
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, whereas Rs 30,000 crore is fully covered by sovereign guarantee, for the remaining Rs 45,000 crore, it has given guarantee cover only to the extent of 20%. Put simply, for 80% 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 [non-performing assets] on former’s books.
Likewise, it is asking 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, the risk of the loan becoming NPA is real.
The government also wants to help street vendors by arranging bank credit facility for initial working capital up to Rs 10,000/- [expected to benefit 5 million] and micro enterprises that availing loans up to Rs 50,000 under the MUDRA Shishu scheme by giving 2% 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 infructuous. This may also be seen from the fact that many businesses/enterprises have got loan sanctions worth hundreds of thousand crore but are unwilling to actually draw the funds. This has led to an anomalous situation whereby despite RBI making plenty of liquidity available with banks, borrowers are not coming forward to avail of the loans. This has forced banks to keep money with the banks under the so called ‘reverse repo’ window earning 3.75%.
Currently, the amount lying unused in this window is a gargantuan about Rs 850,000 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 steep decline in its revenue and increase in expenditure commitment, Modi – government has opted for a package which is dependant 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.
Even as basic food and shelter needs of the poor must be met, all stakeholders should make un-stinted efforts to strictly follow ‘social distancing’. This is the only way Corona can be reined in paving the way for resumption of economic activity.