News Analysis

Why the ₹20-lakh crore stimulus adds up to just ₹2-lakh crore direct impact

Radhika Merwin BL Research Bureau | Updated on May 19, 2020 Published on May 19, 2020

The package, that mainly consists of loans, liquidity measures and structural reforms but very little actual spending by the Centre, is grossly inadequate to compensate for the steep ₹15-18-lakh crore loss in GDP this fiscal

Even as the market and industry waited with bated breath for the finer details of the ₹20-lakh crore stimulus package, every tranche announced by the Finance Minister only amplified the disappointment for businesses and the aam aadmi.

The measures announced by the Centre, though big on reforms, can hardly be termed as stimulus measures to tackle the ongoing crisis. For one, of the ₹20 lakh crore, only about ₹2 lakh crore or 1 per cent of GDP will have a direct impact on fiscal deficit in FY21. Given that various economists have pegged the loss to GDP at a whopping ₹15-18 lakh crore this fiscal (could even go up if lockdowns are extended and there is a second wave of infection), the direct fiscal spending is grossly inadequate to address the ongoing crisis.

Two, many of the measures are in the form of credit guarantee (which means the government stands as guarantor in case of default). How many of these schemes are utilised and reach the last-mile borrowers (cash-starved businesses in particular) needs to be seen. As such, the overall credit guarantees amount to about ₹3.5 lakh crore of contingent liabilities for the government — which do not lead to an immediate outgo but could turn into liabilities in due course of time. Hence, if these schemes are not used judiciously with proper checks, it could come to bite the government in the coming years.

Three, nearly 40 per cent, or ₹8 lakh crore of the ₹20 lakh crore package, includes the RBI’s policy/liquidity measures, wherein the onus falls on the already stressed banks and NBFCs to provide funding to ailing corporates and businesses. Given the heightened risk aversion among banks to lend, this is easier said than done. The steep ₹8.5 lakh crore of funds parked by banks under the RBI’s reverse repo window last week, is indicative of the low risk appetite among banks, which could have eased with a strong fiscal push (but is now missing). In any case, how could reducing the cash reserve ratio (injecting liquidity of ₹1.37 lakh crore), increasing borrowing limit under marginal standing facility (infusing another ₹13.7 lakh crore), targeted long term repo (TLTRO) 1.0 (₹1 lakh crore), TLTRO 2.0 (₹50,000 crore) and special liquidity window for mutual funds (₹50,000 crore) be counted as part of fiscal stimulus measures, is hard to fathom.

Lastly, many of the measures announced are long-awaited structural reforms in key sectors that have nothing to do with the ongoing pandemic crisis and could have been announced any time. These measures essentially help address the supply-side issues over the long run and are not demand boosters. Cash transfers to low-income households, wage subsidies to help employers retain workers, unemployment benefits (including for workers in the informal sector) — measures that have been announced by countries such as Brazil, Indonesia, Malaysia and Philippines, should have been the focus of the Centre.

 

The twisted math of the ₹20-lakh crore package could now cost the economy dearly in the coming months.

The disappointing math

The Centre’s ‘Atmanirbhar Bharat’ package consists of a combination of short- and long-term measures. The total package as summed up by the FM amounts to ₹20.97 lakh crore, which includes the Centre’s earlier announced ₹1.7-lakh crore package under Pradhan Mantri Garib Kalyan Scheme on March 26, the RBI’s measures totalling ₹8 lakh crore, and the five tranches of measures announced last week aggregating to ₹11 lakh crore.

While the total stimulus, that amounts to 10 per cent of GDP, had appeared a plum deal when announced, the finer details have come a cropper. Why?

The key issue with the RBI’s measures has already been pointed out. As such, none of these measures amount to direct spending — so that’s ₹8 lakh crore right out of the ₹20-lakh crore math.

Of the ₹1.7-lakh crore of stimulus announced under PM Garib Kalyan, only about ₹60,000-70,000 crore has a direct spending impact this fiscal. This is because many of the measures such as the wage increase of ₹20 per day increase under MGNREGA (already notified by the Ministry of Rural Development) and the frontloading of payment (of ₹2,000) under the existing PM Kisan Yojana were already part of the Budget.

The balance ₹11 lakh crore announced under five tranches last week only amount to about ₹1 lakh crore of direct impact on the fiscal deficit in FY21. With the loss in economic output (GDP) expected to be ₹15-18 lakh crore this fiscal, the direct spending of measly ₹2 lakh crore by the Centre (putting together all the measures till date), hardly lends comfort.

Let us consider the first tranche of measures that amount to nearly ₹6 lakh crore. These were mainly aimed at offering liquidity support to MSMEs and NBFCs. The ₹3 lakh crore of collateral-free loans for MSMEs with 100 per cent credit guarantee by the government, and ₹30,000-crore special liquidity scheme covering investment-grade debt papers of NBFCs/HFCs/MFIs (again with government guarantee) are good measures as they will allay banks’ fear of lending to these segments. However, how many MSMEs benefit from this, and how these schemes are implemented, needs to be seen. Also, MSMEs that are already under stress or have NPAs are more in need of credit support. While for such companies, the government has announced ₹20,000-crore subordinate debt provision, it may not be easy to implement. Similarly the ₹45,000-crore partial guarantee scheme for low rated debt papers of NBFCs/MFIs may find few takers. Hence, aside from aiding certain large and well-rated MSMEs and NBFCs, the emergency credit line thrown by the Centre may not reach the last-mile borrowers as intended.

Importantly, of the ₹6 lakh crore, only about ₹25,000-30,000 crore will have direct impact on the fiscal deficit as chunk of the measures are in the form of guarantees — the true impact of which on the Centre’s finances will be felt only in the coming years (if there are defaults). The ₹90,000-crore liquidity injection into Discoms will also be in the form of loans given against State guarantees and does not impact the fiscal math.

The second tranche comprises food grain supply to migrant workers, interest subvention for Mudra Shishu loans, Housing CLSS-MIG, additional working capital through NABARD and credit through Kisan Credit — amounting to ₹3.1 lakh crore. These would have just about ₹8,000-10,000 crore of direct cash outflow for the government as the rest are in the form of loans and liquidity measures.

The third tranche of stimulus ushered in long-awaited structural reforms in the agriculture sector — amendment to the Essential Commodities Act, proposing a Central Law to let farmers transport their produce across States and sell at attractive prices. These are indeed big reforms but would yield results only in the long run. These measures do not have an impact on near-term rural income. Hence of the ₹1.5 lakh crore announced under this tranche, only about ₹30,000-40,000 crore would have a direct impact on the fiscal deficit this year.

In tranche four, there were more structural reforms announced for key sectors such as coal, minerals, defence etc. In the last tranche, the Centre provided ₹40,000 crore additional allocation under MGNREGA (direct impact on fiscal) to generate more employment. While this could provide an employment boost, implementation would be critical. In the current fiscal, there has already been a shortfall of over 47 crore person days, and with monsoons on the anvil, how much more work gets generated will decide the actual impact of the higher allocation under MGNREGA on rural income.

In a nutshell, the entire ₹20 lakh crore package, that mainly consists of loans, liquidity measures and structural reforms, and very little actual spending by the Centre (only a tenth), will not propel demand, which is the need of the hour. This will accentuate the pain for industries and more importantly trigger sharp rise in bad loans for banks — the ban on fresh insolvency under IBC for one year is an added set-back for stressed banks.

High borrowings, contingent liabilities

While the Centre’s limited finances may have constrained its ability to announce big bang spending, the frugal outlay can have a cascading impact on GDP growth and revenue collections in the coming years as well. An SBI report states that GDP numbers could have a downward bias from current stress estimate of -4.7 per cent in FY21. In the absence of demand boosters, the recovery in growth could be long-drawn in the coming years, which implies persisting shortfalls in revenue collections, larger fiscal deficit and lower spending (again leading to slower growth).

The estimated central gross market borrowing in FY21 is ₹12 lakh crore (up by ₹4.2 lakh crore estimated earlier). The SBI report pegs revenue loss of about ₹6.5 lakh crore in FY21, which means that adding the actual spending of ₹2 lakh crore (under the stimulus package) would still leave a hole of ₹4.3 lakh crore in the Centre’s coffers. Of the total ₹30 lakh crore budgeted expenditure this fiscal, ₹4.1 lakh crore pertain to capital expenditure. Hence a sharp reduction in capital expenditure to make up for the loss in revenues, could further hurt growth.

On the State front, while the FM increased borrowing limit to 5 per cent of gross State domestic product from 3 per cent earlier, only 0.5 per cent is unconditional increase while the rest is contingent upon fulfilment of certain conditions. But even if we assume an additional ₹2.5-3 lakh crore of additional State borrowings (over and above the ceiling limit of ₹6.4 lakh crore), the State and Centre gross borrowings together would be a whopping 11-12 per cent of GDP in FY21!

Given that such large borrowings would be used to make up the shortfall in revenues rather than pump up spending, weak economic growth and large fiscal deficit can persist for a few years.

There is another risk that the Centre needs to take cognisance of — the sharp rise in contingent liabilities. Thanks to the large number of credit guarantee schemes announced by the Centre, contingent liabilities on account of these alone would be about ₹3.5 lakh crore in FY21. Between FY13 and FY18, contingent liabilities of the Centre have ranged between ₹2.36-3.8 lakh crore, which indicates the magnanimity of the credit guarantees announced under the stimulus package.

While contingent liabilities do not involve any actual cash outgo immediately, they can impact fiscal deficit substantially in case of large credit defaults. Given that Covid is an evolving crisis, how much of the Centre’s sizeable contingent liabilities convert into actual liabilities for the government needs to be seen. According to an IMF paper, contingent liabilities have been one of the largest sources of fiscal risk; the costliest contingent liabilities shocks are often related to the financial sector.

Given that fiscal deficit risks were a given amid the pandemic crisis, the Centre should have gone all out with its spending and focussed on reviving near-term demand — boosting consumption and kick-starting manufacturing. The Centre’s financial jugglery has instead left us with high borrowings that can crowd out the private sector and contingent liabilities that could significantly add to the fiscal costs given our weak financial system, with no actual big bang spending that could have given a boost to the economic growth.

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Published on May 19, 2020
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