Aatmnirbhar Package: A test match

Coronanomy — 04

“We don’t need 2–3 500 crore companies, we need 500 2–3 crore companies”

The “Aatmanirbhar package” was like a test match that was announced in 5 tranches on 5 consecutive days by Finance Minister Nirmala Sitharaman and Minister of State for Finance & Corporate Affairs Anurag Thakur.
India faces a huge ‘life versus livelihood’ dilemma. “It’s not a stark choice between saving lives and livelihoods, you have to actually do both” — said Raghuram Rajan. Fitch Ratings have revised their forecast of India’s GDP growth from 1.8% to 0.8% to -5% as confirmed cases cross over 1.5 lakhs.

Warm-Up Match

On 26 March, the Finance Minister announced 1.7 lakh crore package (0.85% of GDP) which eventually went on to become a part of 20 lakh crore package (That’s why a warm-up match). The package included certain essential schemes such as

• 5kg wheat or rice and 1kg of preferred pulses for free for the next 3 months for 80 crore poor people
• Increase in MNREGA wage from Rs 182 to Rs 202 for 13.62 crores registered families.
• Rs 500 per month for the next 3 months for 20.4 crore women Jan Dhan accounts
• Ex-gratia of Rs 1000 to poor, disabled and widows in 2 installments
• Front loading of Rs 2000 to 8.7 crore farmers under PM Kisan Yojana.
• Free cylinders for the next 3 months for 8.3 crore families registered under Ujjawala Yojana.

There were logistical challenges for delivering foodgrains and maintaining social distancing while doing that. Moreover, there were a lot of people such as migrant laborers who were away from home and did not own ration cards making them ineligible for obtaining free foodgrains. An increase in MNREGA wage was well overdue and basic mathematics tells us that money transferred in women Jan Dhan account was just Rs 17 per day.

After the announcement, Nobel prize economist Abhijit Banerjee said that “Government has not done anything close to enough and they should have been much bolder and should have announced something like 5–6% of the GDP”.

On May 6, Sanjeev Sanyal, principal economic adviser to the government of India said that India has opted for a different approach than other economies. Rather than providing a trillion-dollar package upfront, we aimed to provide a cushion to the system first in terms of 1.7 lakh crore package and RBI measures(covered here and here). He assured that the government is going to roll out a much bigger package soon and more future packages if the situation demands that.

Day 1: Session 1

On 13 May, the first set of announcements were made. Day 1 was mainly focussed on MSMEs, NBFCs, and DISCOMS (Power Distribution Companies).

New Definition Of MSMEs

One of the major announcements on Day 1 was to change the definition of MSMEs itself. The distinction between service and manufacturing was removed and an additional criterion of turnover was introduced and limits of investment increased to nearly double.
So, what used to happen earlier was that existing MSMEs used to fear that if they grow, they will lose the benefits which MSMEs get such as cheap loans, tax rebates, etc. So, there was an incentive to not grow. Increasing the limits will help in the expansion of them which is a key to economic strength and resilience.

100% guaranteed Rs 3 lakh crore loans for MSMEs

This was the biggest scheme of all 5 days in terms of money. The government announced it would provide funding of Rs 3 lakh crore to MSMEs with a 100% guarantee. Liquidity infusion of this size could help these businesses during the economic freeze. Under this scheme, MSMEs will get collateral-free guaranteed emergency credit at concessional interest rates of 9.25% from banks and 12% from NBFCs. Earlier, the interest rate used to be 11–16% from banks and 10–30% from NBFCs. MSMEs will be eligible to borrow only 20% of the outstanding loan or Rs 5 crore whichever is less with a moratorium for one year for a tenure of 4 years. While announcing the scheme, the Finance Minister said that it would help 4.5 million MSMEs resume business activity and safeguard jobs.

But it’s all not so simple. There are some challenges to this scheme. According to the government, in 2015–16, there were an estimated 63 million MSMEs out of which an estimated 4.5 million are expected to receive credit. The revision of MSME definition makes larger firms eligible for the credit resulting in crowding out the ‘micro’ businesses for the credit. Meanwhile, MSMEs were demanding cash handouts, wages of workers, and tax waivers.

20000 crore subordinated debt and 50000 crore Fund of Funds (FOF)

Subordinated debt is an unsecured loan that ranks below other bonds and loans. For example, if a person defaults, then first the bank loans will be paid out before subordinated debt thus they carry high chances of turning into NPA. Government announced 20000 crores subordinated debt for stressed MSMEs that are either NPA or have missed repayments by 30–90 days. Only eligibility criteria is that these firms should be functioning and there should be no frauds. An estimated 2 lakh MSMEs are expected to benefit from it. This is a partially guaranteed credit facility for stressed MSMEs. Here, the government will lend Rs 4000 crore to Credit Guarantee Trust Fund for Micro and Small Enterprises (CGTMSE) who will then extend this money as a partial credit guarantee to the banks.

Finance Minister also announced a Rs 50000 crores Fund of Funds which will be operated as a mother fund and a few daughter funds. The government will start with a corpus of about Rs 10000 crores and the rest will be the money of investors. The aim is to provide capital to the firms with a severe shortage of capital but with growth potential and a high credit rating. The FOF scheme proposes to buy 15% equity in MSMEs and encourage them to get listed on Stock exchanges. This is expected to provide relief to 25 lakh MSMEs.

Though, this Funds of Funds was originally announced on 1st February in Union Budget and then again announced as a part of a stimulus package. Also, it needs to be seen how optimistic are investors regarding this scheme in these grim circumstances.

Day 1: Session 2

30000 crore liquidity facility for NBFCs

Under this scheme, 100% guaranteed credit of Rs 30000 crore will be provided to investment-grade NBFCs that are finding it hard to raise money from banks for a tenure of 3 months. The immediate contribution of the government will be Rs 5000 crores and the rest will be given by RBI by buying the bonds associated with this scheme. However, the financial implication on the government will increase if someone defaults on their repayments.

However, this scheme was heavily criticized for its tenure as NBFCs wanted a tenure of at least 3 years rather than 3 months. NBFCs lend money for a longer duration of time, from 2–3 years to 15–20 years, so paying back the money in 3 months in these circumstances when the moratorium is in effect is impractical. The NBFC body FIDC has already labeled this scheme as a non-starter and no NBFC will be able to repay the money in 3 months.

PCGS 2.0 of Rs 45000 crores

Partial Credit Guarantee Scheme 2.0 provides a 20% guarantee on credit provided by banks to NBFCs, Housing Finance Companies, and Micro Finance Institutions. Under this scheme, banks are to lend money to low-rated NBFCs or stressed NBFCs who have missed their repayments. The tenure is from 9 months to 18 months. According to public sector banks, this is a good scheme as they have a lot of money but very few avenues to lend but a guarantee of 20% is very lucrative and will provide them with an incentive to lend to NBFCs. This scheme is a yes-yes from both parties. Banks get insurance of 20% and NBFCs who are cash strapped get much-needed liquidity.

Day 1: Session 3

90000 crore liquidity for DISCOMS

Power Distribution Companies (DISCOMS) are facing unprecedented cash-flow problems. With the majority of the industries and factories shut, power demand has reduced dramatically. DISCOMS were already reeling under the debt of Rs 94000 crores. Thus, this liquidity injection is aimed at clearing their dues. These funds are guaranteed by the respective state governments and will be provided at a concessional interest rate of 1.5% lower than usual. The tenure ranges from 7–10 years with a moratorium of 2 years. These funds will be linked to certain much-needed reforms such as increased digital payments, prepaid metering, and reduction in transmission losses.

This decision of the government was lauded by the industry and even termed it as a lifeline for the sector. As clearing dues removes the burden on DISCOMS, they can then assure uninterrupted power supply which is extremely important for the infrastructure sector. But this is a temporary solution to a much bigger problem until issues such as low billing and collection efficiency, AT&C losses, delayed receipt of a subsidy, etc are not methodically addressed.

Other announcements made on Day 1 include:

• Extension for the due date of income tax returns up to Nov 30, 2020
• Immediate payments of all pending government dues to charitable trusts, non-corporate business, etc
• Extension of the completion date of real estate projects
• All government tenders below Rs 200 crores to be given to Indian companies supporting. A step towards “vocal for local”
• 50000 crores liquidity due to reduction of TDS (Tax reduction at source) / TCS (Tax collected at source) by 25%. This is applicable for the rest of the year. However, this is not applicable to salaried taxpayers. This will leave extra money in the hands of the people encouraging them to spend more and revive the economy.
• EPF (Employee Provident Fund) supports up to 10000 crores

Overview

As a saying goes in test matches, “Give the first session to the bowlers”, which means to play safely not recklessly. The measures taken on the first day were definitely not reckless and on the right track as the first priority for the government was to provide a helping hand to the MSMEs and NBFCs (who mainly lend money to MSMEs) as this is the largest employer in the country and this is the sector where the growth takes place. Just giving out money to the MSMEs by borrowing or printing money would have been a very unsustainable idea and very less fiscal space allows for only credit guarantees. They won’t cost the government that much immediately but gives the support worth Rs 5.94 lakh crores with a majority of them coming on the supply side. These measures ease the credit for the firms and start their factories and pay their workers. However, the government did not announce any significant demand-side measures and any Keynesian would argue that the only way to revive the economy is the judicious injection of money on demand-side to solve the problem of unemployment.

In the next blog…

“India is walking home”, as millions of migrant workers, with their meager belongings, trekking along India’s deserted highways, return to their villages after walking hundreds of kilometers. Such images were last seen during the India Pakistan partition. The system has failed them.

On Day 2, measures were announced keeping these returning workers, urban poor, and farmers in mind. In the next blog, we analyze the announcements made on Day 2 of the package.