June , 2020
Government’s measures for economic survival and revival from lockdown shock
01:49 am

Tushar K. Mahanti

If the present is not beautiful, the future must be glorious. This probably explains the essence of the government’s `20 lakh crore stimulus package announced recently to rescue the economy from going into deceleration due to the prolonged lockdown. From providing relief to the MSME sector to unleashing structural reforms in key sectors like mining, aviation, defence manufacturing, power, atomic energy, and agriculture, Finance Minister Nirmala Sitharaman has touched almost all important areas of manufacturing and services in her package. Sitharaman has also provided relief to migrant labourers and street vendors through free ration and special credit facility, talked of providing affordable rental accommodation and taken substantive steps for upgrading the farm-gate infrastructure.

At 10% of the GDP, the package seems to have covered all major areas of the economy. Taking together the fiscal stimulus brought out by RBI's monetary support and incentives declared earlier, India has put itself in the league of developed nations that have gone all out against the virus. As is the case with other global stimulus packages, India has presented a mix of monetary and fiscal measures.


But unlike other countries, whose stimulus packages centred primarily on doling funds to ease out the immediate economic disturbance caused by lockdown, Prime Minister Narendra Modi tried to transform this crisis into advantage by formulating the package so as to achieve long-term economic benefits. Dubbed as Atmanirbhar Bharat Abhiyaan, the package puts bold reforms at the heart of Modi's long-stated plan to make India self-reliant.


Modi is fully conscious of the boundless advantages of globalisation, but at the same time, the present crisis has made him realise the need for self-reliance. The crisis has shown the problem of over-dependence on the global supply chain. Many sectors have been grounded due to the want of supplies. According to a report by Fitch Rating, Indian manufacturers rely on China for 60% of their electronic components. More frightening is the fact that more than half of the active ingredients needed to manufacture antibiotics, vitamins, hormones and steroids in India come from China. The sealing of international borders due to Covid-19 has stopped such supplies.   


Rs. 20 lakh crore package


In his speech, Modi said his package would focus on land, labour, liquidity, and laws and would deal with MSMEs, the working class, middle class and also address industrial concerns. He also talked of empowering the poor and migrant workers, both in the organised and unorganised sectors.


The FM has divided the package in five tranches to take account of the promises made by the PM. The first tranche included funding as well as loan guarantees to small businesses, non-bank lenders, discoms and salaried workers. For MSMEs, a collateral free loan of Rs. 3 lakh crore was provided. In addition, a subordinate debt provision of Rs. 20,000 crore for two lakh stressed MSMEs was also declared. Besides, there will be Rs. 50,000 crore equity infusion via ‘Mother fund-Daughter fund’ for MSMEs that are viable but need handholding.


For non-bank lenders, a Rs. 30,000 crore special liquidity scheme with government guarantee was provided for investing in investment grade debt paper of NBFCs, HFCs and MFIs.  For discoms, a one-time emergency liquidity injection of Rs. 90,000 crore against all their receivables was provided against state guarantees. The total amount of the first tranche was Rs. 5,94,550 crore.


The second tranche with Rs. 3,10,000 crore kitty focused primarily on migrant workers and small farmers. Migrants were given free ration at a cost of Rs. 3,100 crore and promised of ‘one nation one ration card’ and cheap rental accommodation for future exigencies. For street vendors, a special scheme to avail Rs. 5,000 crore loan facilities was mooted. An interest subvention of 2% for the next 12 months was granted after the moratorium period was extended by the RBI for those who have availed loans up to Rs. 50,000 under the Mudra Shishu loan. Three crore people will get benefit of around Rs. 1500 crore from this extension.


For small and marginal farmers, the government extended a Rs. 30,000 crore additional emergency capital funds through NABARD for post-harvest rabi and kharif related activities. Under the PM Kisan Credit Card, Rs. 2 lakh crore of concessional credit was granted to boost farming activities including animal husbandry and fisheries. It will benefit 2.5 crore farmers.


The third tranche included schemes for framers and sectors such as food processing and allied activities and allocated Rs. 1,50,000 crore. The government promised to spend a one lakh crore fund for strengthening the farm gate infrastructure like cold chains, post-harvest storage infrastructure and allocated another Rs. 10,000 crore fund for micro food scheme which will be executed with a cluster-based approach. Pradhan Mantri Matsya Sampada Yojana will be launched for development of marine and inland fisheries. A sum of Rs. 20,000 crore will be spent to fill the gaps in value chains. Another Rs. 15,000 crore will be spent on ramping up the dairy infrastructure and Rs. 4,000 crore will be spent for growing herbal and medicinal plants.


In a major policy reform, the government proposed amendment to the Essential Commodities Act to enable better price realisation for farmers. Food items including edible oils, oilseeds, pulses, onions, and potato will be deregulated. A facilitative legal framework will be created to enable farmers for engaging with processors, aggregators, large retailers, exporters in a fair and transparent manner to get better prices of their products.


Break-up of the Covid-19   package



Amount (Rs crore)

RBI measures


Tranche 1 (MSMS+NBFC+Power)


Tranche 2 (Migrant+ KCC+ NABARD, etc)


Tranche 3 (Agriculture)


Tranche 4 & 5 (Key reforms)


Measures taken before






The fourth and fifth tranches included structural reforms in eight critical sectors - coal and minerals, defence production, airspace management, social infrastructure projects, power distribution companies, space, and atomic energy.


The package proposed commercial mining of coal and intends to enhance CIL's target of 1 billion tonnes of coal production by 2023-24 and to encourage coal production from private blocks. The FM proposes to increase private investment in the mineral sector. As many as 500 mining blocks would be offered through an open and transparent auction process.


The next important reform came in defence production. Indigenisation of imported spares, separate budget provisioning for domestic capital procurement we proposed. FDI limit in defence manufacturing under automatic route is being raised from 49% to 74%. Corporatisation of the Ordnance factory board was also announced.


In civil aviation, the government proposes to do away with the restrictions on the utilisation of Indian air space to make civilian flying more efficient. Government also wants India to become a global hub for aircraft maintenance, repair and overhaul. Power distribution companies in Union Territories (UT) will be privatised in line with the new tariff policies. This will enable to strengthen industries and bring in efficiency in the entire power sector. For boosting private participation in the space sector, the government is working on a liberal geo-spatial policy with increased private participation.


To meet the immediate socio-economic needs, the government in the fifth tranche allocated an additional funding of Rs. 40,000 crore to MGNREGS over and above the budgetary estimate. As for the health sector, the FM announced that all districts will have infectious disease hospitals and health labs will be set up at the block level.


In education, PM eVidya programme was announced. Each classroom from 1 to 12 will have one TV channel. It also entailed special e-content for the visually and hearing impaired. Students. Top 100 universities will be permitted to start online courses by May 30, 2020. FM has also given some lee-way in IBC and declared that Covid-related debt will be excluded from definition of default under the IBC. There will be no fresh insolvency for the next one year and minimum threshold to initiate insolvency was raised to Rs. 1 crore from the Rs. 1 lakh crore earlier.


Controversies over the size of the package


The package consists of three primary components – a set of measures taken by the government before Modi’s speech on May 12, the RBI’s liquidity measures over the last two months and the five tranches announced by Nirmala Sitharaman. That is, the package includes previously announced measures by the government and also monetary stimulus given by the central bank. In addition, a big part of the stimulus is estimated to come as bank loans making the government’s own contribution substantially lower than what was projected. In fact, according to Fitch Solutions, the actual fiscal impact of the additional stimulus would be only about 1% of GDP.


SBI research wing suggests that of the Rs. 20 lakh crore stimulus package, a big part will be undertaken by the RBI directly, leaving the exchequer untouched. According to SBI research, the direct contribution of the government comes to about Rs. 2 lakh crore or 1% of the GDP. Nomura and Barclys estimated the government’s direct contribution to be even lower (0.8% and 0.75% respectively).


Demand-supply mechanism


In another move to reduce the cost of funds, the RBI has slashed the key rate by 40 basis points to a new all-time low of 4% - two weeks ahead of the scheduled monetary policy review. India needs higher investment to reverse the economic downtrend caused by the lockdown. The cut in interest rate will lower the cost of funds and the government expects that this will boost investment.


But will a reduction in the cost of funds necessarily prompt industrialists to invest? Not unless their projected financial return justifies the investment. And this needs a steady demand growth. As such, industries would not increase production unless they can sell the produce, let alone investing in new projects or extending existing capacity. So, the basic issue before the government is to incentivise demand growth. This is not a new dilemma caused suddenly by the lockdown. Indian economy has been suffering from lack of demand for the last two years. As industries were failing to sell their products, they refrained from producing more.


The lockdown has intensified the problem. It has hit the income of around 60% households across India according to a study by Nielsen conducted in 12 cities. The study finds that about three-fourths of the respondents who had plans to buy durables or to take travels have now discarded those plans. This is reflected in the sharp fall in consumer durable sales in April — down by 34% over the same period last year.


With a nationwide lockdown in place for the better part of April and May, the total quantum of economic activity in the country — measured by the monetary value of all goods and services produced — has sharply declined. Given an uncertain future, most observers estimate that the Indian economy will contract. This means the Gross Value Added (GVA) or the income earned across sectors — agriculture, industry and services — will fall.


As incomes fall, households will cut down their expenditure. Businesses which were already not investing will postpone their investments further - following the fall in overall demand. The contraction of the economy will hit the government’s revenue earnings too. These three types of expenditures — by households, businesses and government make up the GDP. There is another component, namely, exports, but with the global demand plummeting, this too is unlikely to help matters. It must be mentioned that exports crashed by 60% in April.


Of these four engines of growth, only the government can spend money even when it doesn’t have it. And the government is doing it by announcing the `20 lakh crore stimulus package. It is a different issue how much of this amount is the government’s own money. However, more importantly, the lion’s share of the package is going to buttress the supply side when the falling demand curve is the major growth issue.


In fact, in a recent interview Nobel Laureate Abhijit Banerjee finds that only about `2 lakh crore of the package will go directly to increase demand, the rest will go to prop up the supply chain. This money will take a long time to be spent and to reach the consumers. There are controversies over the size of the government’s direct contribution to the stimulus package. There are questions about the supply side skewedness of the package when lack of demand is the bigger threat. What, however, comes out is that the government has taken serious steps to rescue the economy.


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