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May 20, 2020Stimulus package falls short of meeting immediate concerns
Union Finance Minister Nirmala Sitharaman announced five tranches of economic stimulus under Atmanirbhar Bharat to save the ailing economy.
The first tranche was comprehensive, and responsive to the plight of the Micro, Small Medium Enterprises (MSMEs). The sector, contributing over 28 percent to the GDP and employing about 30 percent of the workforce, has been reeling under the COVID-19 pandemic. The move was undertaken to infuse liquidity in the market and to revitalise the sector. The measures also attempted to allay the concerns of the banking sector that showed indisposition to disburse credit to the businesses.
The collateral-free automatic loans extended to those who have a turnover of Rs 100 crore was proposed with an intent to increase the credit lending of banking institutions. The scheme will benefit 4.5 million MSMEs, which is less than 10 percent of the 63 million MSMEs in India. Ideally, credit guarantee requires a fine balancing act where the risks are shared between the guarantor, borrowers and the bank. The guarantor should only take as much risk as it can to incentivise banks to extend credit. Given the unprecedented nature of the pandemic, the provision of 100 percent credit guarantee on principal and interest may seem rational, but there will be an increased chance of strategic defaults. That said, the move will certainly encourage banks to lend.
The subordinate debt scheme, which was proposed in the budget, featured in the announcements for stressed MSMEs. The partial credit guarantee support provided in the scheme is less likely to translate into the required line of credit, given the uncertain outlook lenders have now. The banks have the discretion to exclude the potentially risky MSMEs to maintain their financial stability.
One substantive announcement was the change in the definition of an MSME. This will help the enterprises to scale up in the long-run without having to lose its status and benefits.
The overall measures introduced in the first batch were mostly in favour of big players with viable businesses. The measures do seem impressive, but the problem lies in the realms of banks being risk-averse.
As Lockdown 4.0 is underway, businesses, especially MSMEs, will continue to face a severe liquidity crunch. To remain afloat, the sector needs immediate support through refunds, tax benefits, etc. It is not clear as to how soon these credit schemes will meet the immediate requirements of the sector. The initiatives are good from a long-term perspective. The government needs to ensure that they are translated into letter and spirit on the ground.
The first batch of measures were sadly mum about addressing the concerns of the migrant labourers who form a big part of the MSMEs’ labour force. Unless the distressed labourers are not assured with an arrangement of their safe return and safety protocols in workplaces, any stimulus given to the factories will be futile.
Pro-Poor Or Poor Measures?
What followed the MSME measures were schemes targeting the poor. Foodgrains for migrant returnees, credit schemes to street vendors and farmers were some of the measures announced. Schemes such as Pradhan Mantri Swasthya Suraksha Yojana (PMMSY), National Animal Disease Control Programme (NADCP), Animal Husbandry Infrastructure Development Fund (AHIDF), etc. featured in the subsequent announcements. They were a hyperbolised narration of the existing schemes presented in the budget with no special allocation. Perhaps what is new are the series of amendments introduced in the agriculture sector, which will go a long way in resolving some bottlenecks in the process.
A direct fiscal measure taken by the government for the poor was free foodgrain supply to the migrant returnees for two months. Nearly Rs 2 lakh-crore was proposed to be given to farmers through Kisan Credit Cards (KCC). The subsequent measures were credit schemes to farmers and street vendors. It must not be forgotten that bad loans in the agriculture sector have zoomed over time, pushing many farmers to the brink. The credit schemes to the impoverished households will put additional pressure on them to repay the debt. Moreover, the scheme has achieved limited coverage. The Print recently reported some concerning statistics regarding the coverage of these schemes; only around 45 percent of farmers possess an operative KCC, and the errors in excluding many poor farmers remain pronounced.
A key task in all of these announcements entails plugging the gaps by ensuring comprehensive coverage.
The additional allocation of Rs 40,000 crore to the MGNREGA and the consideration to keep the work open in the monsoon season, is a welcome move to generate rural employment. This again does not immediately help the workers tide over the present livelihood crisis since the work will be full-fledged only when there is a substantive easing of lockdown. With uncertainty looming over, the intervention should prioritise more on giving direct benefits to this segment for its survival.
Wisdom Dawned Late
One of the laudable reforms is the One Nation-One Ration Card scheme, an idea that took too long to launch. A successful implementation in creating a portable ration card will benefit a large number of inter-state and intra-state labourers who otherwise risked being ineligible for social security schemes. Much of the ongoing migrant crisis could have been prevented if the scheme was in place. Better co-ordination between source and destination states will benefit migrant labourers.
The reforms also included deregulation of inter-state barriers on movements of agricultural products, amending the archaic Essential Commodities Act, etc. This is expected to improve the supply chain and eliminate the network of intermediaries in the system by enabling a direct purchase from farmers outside the Agricultural Produce and Marketing Committees (APMCs). A fine print of the legal framework is required to better assess the action.
The package of Rs 20 lakh-crore covers an extensive range, but it falls short of meeting the concerns of the poor. We need a concrete fiscal stimulus to revive demand; the liquidity measures taken by the government were from the supply side. The propositions at large, have been a combination of credit schemes, tax-deferments, amendments and re-announcements of existing schemes. Putting money in the hands of the poor through fiscal measures will only address this humanitarian crisis.
This article was published in Money Control on May 20, 2020. Click here to read
(Vidhi Rupal, Research Intern at CPPR, has assisted for research for this article)
Views expressed by the author are personal and need not reflect or represent the views of Centre for Public Policy Research.
Nissy Solomon is Hon. Trustee (Research & Programs) at CPPR. She has a background in Economics with a master’s degree in Public Policy from the National Law School of India University, Bangalore. After graduation and prior to her venture into the public policy domain, she worked as a Geographic Information Systems (GIS) Analyst with Nokia-Heremaps. Her postgraduate research explored the interface of GIS in Indian healthcare planning. She is broadly interested in Public Policy, Economic Development and Spatial Analysis for policymaking.
