The ‘Atmanirbhar Bharat’ rhetoric behind the COVID-19 stimulus package had an immediate impact on the collective psyche of the nation. After one month, however, the Rs 21 lakh crore package doesn't seem to have given any thrust to the sectors for which the measures were announced.
Loan guarantees, central bank stimulus, loan moratorium and tax deferrals constitute a bulk of the fiscal package, with the final number making the relief package look bigger than it is and, to an extent, misleading. While the package is approximately 10.5% of GDP, it actually amounts to only about 1.2% of GDP.
There has been demand for at least an actual fiscal stimulus of 1% to 2% of the GDP to provide immediate relief. The industry body FICCI has been advocating injection of funds to the tune of Rs 10 lakh crore to help people with extremely limited means and to support agricultural sector. They have also asked for support in funding the wage bill during the lockdown — particularly among small and mid-sized manufacturers, service sectors including hospitality, healthcare, retail and transportation—and providing liquidity and forbearance to aid the restart of operations.
Analysts suggest that sectors like tourism, hospitality, aviation, media and entertainment could take 12 to 18 months to bounce back and therefore, require special support through long-term restructuring.
FICCI has requested that a minimum amount of Rs 20,000 crore be allotted for these sectors, as they have seen maximum dip in demand.
The complete shutdown of economic activity has led to a revenue shortfall — both in tax and non-tax revenue collection — which will pressure the central government's finances in 2020-21. The disinvestment target of over Rs 2 lakh crore is not expected to be met as market conditions will not be congenial for sale of assets; in turn, government spending towards relief measures will continue to rise.
All this will pressure the government to borrow more and it has already exceeded its budget target by Rs 4.2 lakh crore, to touch Rs 12 lakh crore. With the expected revenue shortfall and the COVID-19 package, the fiscal deficit of the centre and states combined is expected to be nearly 12% of the GDP, the highest since the 1970s, when the data became available. However, the severity of the crisis does not suggest that the government should care for fiscal consolidation beyond a point. Even the GDP forecast in these uncertain times, appears irrelevant.
However, sources in the government say there will be no further large stimulus package until September or October. If that is the case, most of the service sector, which form the backbone of the country’s economy, will continue to be under pressure.
India is not alone in announcing a fiscal stimulus package whose headline number belies the details inside; other emerging economies such as Thailand, Brazil, South Africa, and Malaysia have done the same. Their actual stimulus is under 5%, though the number amounts to between 12–17% of the GDP. The same is true for developed economies of Germany and Canada as well.
A comparison of COVID-19 support packages of 20 major nations done by brokerage Motilal Oswal said the actual fiscal stimulus is the lowest for India, at 1.3% of GDP and the highest for Singapore at 10.4% of GDP.
Who benefits from the stimulus?
Worse, the fine print of the stimulus suggests that relief might not be reaching the beneficiaries for who the scheme is intended. For instance, the collateral-free loan announced for Micro, Small and Medium Enterprises (MSMEs) does not benefit a large chunk of them who are out of the formal banking system. The non-banking finance companies (NBFCs), which are the MSMEs’ major lenders, are themselves stressed ever since the Infrastructure Leasing & Financial Services crisis. For stressed lenders, the last-mile implementation of the government programmes is crucial.
As on June 19, the public sector banks have disbursed Rs 21,029 crore under the Rs 3 lakh crore Emergency Credit Line Guarantee Scheme (ECLGS) for the MSME sector reeling under stress, as part of the ‘Self-Reliant India Mission’ package.
“The government should ensure that banks implement the scheme effectively. A large number of MSMEs, which are out of the banking system, need support. Depending on whether they pay GST or not, specific financial instruments need to be developed,” said Dilip Chenoy, Secretary General, FICCI.
According to him, massive effort and outlay is needed to return to a modicum of normalcy even over a few years; he even emphasised the need for further stimulus, especially to boost demand. In terms of priorities for reviving the industry, a one-time restructuring of loans of critical sectors should be permitted, as the pandemic has ravaged their balance sheet and the future prospects.
However, under the ECLGS, those under the SMA-2 accounts, a category for entities which have defaulted on payments beyond 60 days in the past, are not eligible to secure fresh loans. “In the current scenario, such borrowers should be given support so that they can revive their industry and support their dependent employees,” said R Raju, President, Karnataka Small Scale Industries Association.
“The government has tried to address many sectors strategically. But the implementation is a challenge. Banks are asking for hundreds of things before sanctioning loans to MSMEs which are struggling to survive. We need to give them oxygen (liquidity) to survive at this crucial juncture,” added T Parasuraman, Deputy Managing Director, Toyota Industries Engine India.
It is estimated that at least 20-25% of all SMEs in the country will shut down permanently. Their problems are plenty: shortage of workers, working capital, lack of orders from big industries, inadequate liquidity to pay salaries to their employees, rent and taxes to government bodies. “The least the government should have done was to give salary support to MSMEs for two months of lockdown period out of the huge corpus lying idle with the Employees State Insurance Corporation,” Raju added.
Across India About 16 crore migrant workers have left for their homes. The key challenge for the government is to bring them back to their places of work and normalise operations for all the sectors.
The recent wholesale price inflation (WPI) number reflects pricing power of Indian manufacturers has all but vanished struggling with the demand slowdown, which has been accentuated by the public health crisis.
WPI at minus 3.21% in the month of May is a cause of concern. Low inflation is something to be desired, but a negative inflation— either retail or wholesale, reflects disappearance of pricing power of the manufacturers.
Demand and supply constrained
According to Deepak Sood, Secretary General of Assocham, the policy makers, including the Reserve Bank of India and the government think tanks should get a clear message from the unfolding trends.
“We find ourselves in a situation where both demand and supply sides are getting constrained. That must be addressed sooner than later. Ironically, the industry is starved of cash and slipping further into debt, making it imperative for the government to raise resources through non-tax means and spend it liberally. This is the time for the country to invest in strategic business areas, which can help create long-term value and drive economic growth for the country,” he said.
Corporate results for the first quarter are also expected to be extremely disappointing. Going forward too, the macro-economic outlook remains bleak owing to lack of demand, said Chenoy.
The consumer confidence survey of Reserve Bank of India (RBI) of 5,300 households in 13 cities has shown a complete collapse of consumer confidence in May. It also reflects a pessimistic expectation by Indian households in the next one year. The RBI has yet not released the industrial outlook survey. The last one in February too had shown that profit margins of manufacturers were subdued due to weak demand and negative sentiments on selling prices.
Chenoy said it is difficult to tell precisely when the economy will bounce back, as a lot of it depends upon the extent of the impact of the support measures provided by the both central and state governments. Some sectors will recover fast, while many others will take six to 12 months and longer.