December , 2020
Understanding government stimulus: How did it aid to boost the economy during pandemic?
11:47 am

Kuntala Sarkar and Aritra Mitra

The pandemic has only accelerated the slowdown of the Indian economy that was on a downslide for quite some time. The central government till date has announced three stimulus packages to shield the declining economy due to the Covid-19 shock. The stimulus 1.0 included the government’s `1.70 lakh crore relief package in addition to RBI’s liquidity initiatives. Under this, the government also proposed to pay 24% of the monthly wages into EPF accounts for March, April and May to the wage-earners earning below `15,000. Later, between May 13-17, an inclusive stimulus package 2.0 was announced in five successive tranches amounting to `20,97,053 crore - that included the earlier stimulus 1.0. Significantly, the additional budgetary support was limited to 9.7% of the whole package and 5% was already in the budgeted expenditures. Recently, the latest package of stimulus 3.0 was announced in November -  worth `1.19 lakh crore. These measures are supplemented by RBI’s reduction of repo rate by 40 basis points taking it to a low level of 4%.

RBI has recently announced that India is going through a ‘technical recession’. This article aims to evaluate the four major sectors of the Indian economy and how the government was active in saving these sectors. 

Manufacturing sector

Background - During March, 2020, the Index of Industrial Production (IIP) experienced a record shrinkage - by -16.7% compared to 4.6% in February because of the sudden Covid-shock. Output of eight core infrastructure industries or the core IIP reduced by -6.5% in March, compared to 5.5% in February. Manufacturing and electricity sectors’ outputs also slowed by -20.6% and -6.8% respectively in March compared to the growth of 3.1% and 11.5% in February. The mining sector output showed a zero growth. This trend continued as the Purchasing Managers’ Index (PMI) - that is the indicator of business activity in the manufacturing and service sector - also contracted. According to an Ernst & Young (EY) report titled ‘Economy Watch: Monitoring India’s macro-fiscal performance, May 2020’, in the manufacturing sector, the PMI went down to 27.4 in April from 51.8 in March. Hence, for sustaining the momentum in economic activity, the central government focused on the manufacturing sector.

Stimulus benefits - Introduction of commercial mining in the coal sector has been one of the biggest steps by the government. It was initiated for evacuation of the enhanced Coal India’s target of 1 billion tonnes coal production by 2023-24, plus coal production from private blocks. The government also allocated `50,000 crore for infrastructure development for coal mining and that is expected to boost this core industry.

Incentive schemes for promotion of new sectors were launched in sectors like Solar PV manufacturing, advanced cell battery storage etc. A total of 3376 industrial parks/estates/SEZs in five lakh hectares were mapped on the Industrial Information System (IIS) and all the industrial parks were to be ranked in 2020-21. Additionally, few measures have been allotted specially for MSMEs and that will aid Indian manufacturers. In the self-reliant packages, the government also highlighted the Make-in-India initiative to boost domestic manufacturers.

In November, Finance Minister Nirmala Sitharaman announced 12 measures under the stimulus 3.0 that were expected to boost the employment scenario - both in the formal and informal sectors. The central government also announced new production linked incentives under the additional `2 lakh crore Production Linked Incentive (PLI) scheme for 10 major manufacturing sectors.

Post-stimulus - India’s manufacturing sector has witnessed retrieval in the July-September quarter (Q2). Industry body FICCI’s quarterly survey on manufacturing points showed a 24% rise in Q2 compared to its preceding quarter. The overall capacity utilisation has also risen in Q2 to 65% as compared to 61.5% in the January-March quarter (Q4) in FY 2019-20. The manufacturers of 12 major sectors like automotive, capital goods, cement and ceramics, chemicals, fertilizers and pharmaceuticals, electronics and electrical, leather and footwear, medical devices, metal and metal products, paper products, textiles, textile machinery have shown positive responses as the country moved towards normalcy. According to a data released by IBEF, India’s manufacturing PMI has also improved and stood at 46 in July 2020.


Background - Only the agriculture sector had saved itself during and before the pandemic. Monsoon at 102% of the Long Period Average (LPA) helped the sector to cushion the country’s economic shock. The ‘Macroeconomic Report - June 2020’, published by the Department of Economic Affairs informed that this year, kharif sowing has been at a 104.3% - higher than previous year’s acreage. According to a Ministry of Agriculture data released on May 15, 2020 - agriculture and allied activities’ contribution in food grains production increased by 3.7% than last year. Sale of fertilizers also shown an increase of around 98% (year-on-year) in May 2020 and that reflected the good health of the agri-sector. Additionally, government data informed that 42 lakh farmers have been benefitted with around `73,500 crore sanctioned for the Minimum Support Price (MSP) only for wheat. But a consistent allegation has been there that most of the small and marginal farmers (who are more than 80% of total farmers) are not getting the MSP. The government also announced a number of stimulus packages for the agri sector.

Stimulus benefits - Through the National Bank for Agriculture and Rural Development (NABARD), an Additional Emergency Working Capital of `30,000 crore was allocated for farmers. Additionally, `90,000 were provided for meeting crop loan requirement of Rural Cooperative Banks and Regional Rural Banks (RRBs). This is expected to benefit around three crore farmers.

The government stimulus packages were based on insurance schemes like PM Fasal Bima Yojana, PM Suraksha Bima Yojana, PM Jeevan Jyoti Bima Yojana, and Ayushman Bharat and credit guarantee programmes. The government allocated a `2 lakh crore credit boost for 2.5 crore farmers under the Kisan Credit Card (KCC) Scheme to provide concessional credit to PM-KISAN beneficiaries. Additionally, the PM-KISAN scheme will receive a fund transfer of `18,700 crore and the PM Fasal Bima Yojana will receive `6,400 crore. Under the Pradhan Mantri Garib Kalyan Package-2, `2,000 were also paid to 8.7 crore farmers each for the PM-KISAN scheme.

During the lockdown, farmers faced a huge gap in the supply chain of crops. Lack of adequate cold chain and post-harvest management infrastructure also hampered the system. So, at the end of May, the government promised a financing facility of `1 lakh crore for funding agriculture infrastructure projects at farm-gate and aggregation points. Additionally, three crore farmers have also benefitted with a three months moratorium for agricultural loans of `4.22 lakhs crore.

Post-stimulus - The farm sector has been benefitted with this stimulus. Available report informed that around 25 lakh new KCCs were sanctioned with a loan limit of `25,000. Now these farmers can access institutional credit at concessional rates of interest.

In 2020-21, the government is targeting food grain production of 298 MT, an IBEF data stated. Till June 26, kharif sowing jumped by 104.3% over last year’s acreage and that will help to meet the target. The government is also trying to focus on larger procurement of agri-products to benefit the farmers. After a break in the system, export of agri-commodities also surged by 43% during April-September this year as compared to the same period in the previous year.


Background - The national Covid-19 lockdown and consequent loss of production had a huge impact on the MSME sector.  This sector accounts for about 40% of exports and almost one-third of national output. The loss of migrant labourers was another factor that hit this sector. In order to avoid closure of units and damage of livelihoods, a financial package was very much necessary for this sector. According to an All India Manufacturers Organisation (AIM0) study, India is currently home to over 75 million MSMEs and if the lockdown surpassed four weeks, close to 25% of these firms will face closure. According to industry insiders, the sector was already reeling under huge distress because of demonetisation, followed by the poorly implemented GST and the prolonged economic slowdown.

Stimulus benefits – In the stimulus package, a new definition of the MSMEs was introduced – the investment limit was revised upwards and additional criteria for turnover was introduced.  `3 lakh crore ($39 billion) collateral free loan was announced with 100% credit guarantee. `20k crore ($2.6 billion) subordinate debt was included for the stressed MSMEs. An equity infusion of `50k crore ($6.5 billion) was announced for the MSMEs with growth potential and viability through Fund of Funds. In order to boost the ‘Atmanirbhar Bharat’ initiative, it was announced that no global tenders for government contracts up to `200 crore ($26 million) will be allowed. It was also decided that e-market linkage will be promoted as replacement of trade fairs and exhibitions and the MSME dues will be cleared within 45 days by the government.

Post-stimulus - The `3 lakh crore Emergency Credit Line Guarantee Scheme (ECLGS) sought to bring relief for the MSMEs struggling to resume business and pay salaries. Under this scheme, banks have sanctioned loans totalling `1.6 lakh crore. As of early September, the disbursements stood at around `1,13 lakh crore. According to a yourstory.com report titled, “4 months on, how Aatmanirbhar Bharat stimulus package is helping MSMEs survive COVID-19”, as of early September, the State Bank of India (SBI) had sanctioned `24,388 crore of loans, disbursing `18,971 crore. Punjab National Bank (PNB) officials informed that as of September 22, the bank had sanctioned `8867 crore for the Covid-hit MSMEs.

Financial Express report on September 22 stated, “Government buyers are liable to pay MSMEs within 45 days of the acceptance of the order from MSMEs even as complaints made to MSE Facilitation Council (MSEFC) have to be decided within 90 days.” According to government data, MSME dues pending by various ministries and central public sector enterprises (CPSEs) declined from `969.19 crore in July to `834.05 in August. As of September 15, 2020, 24 ministries and 86 CPSEs reported `3,770.04 crore total dues in August out of which `2,936.08 crore dues were paid.

Experts pointed out that the ban on imports from certain countries like China can be counterproductive for growth of the MSME sector. In an interaction with Zakir Hussain, Director, BD Software Distribution said, “There is a growing discontent against China all over the world and so if Indian IT companies utilise this opportunity, they will be able to expand their business internationally as well. Earlier, India did not make PPE kits but now it is one of the biggest hubs. IT is a bit more difficult than this but if we start from now, we will be able to capture the global market.” He also stated that most of the hardware parts are imported from China and India should strengthen its manufacturing base to become a key player in the global market.


Background - The declining trajectory of non-bank credit growth began in the second half of 2018-19 amidst the economic slowdown and continued in fiscal 2020 with the onslaught of the pandemic. The gradual impact of the economic slowdown on the sector was expected to enable defence mechanisms. However, the pandemic rendered an immediate and debilitating impact.

Stimulus benefits - A `30k crore (USD 3.9 bn) liquidity infusion was announced for the NBFCs/HFCs/MFIs. Also, a `45k crore (USD 5.9 bn) partial credit guarantee scheme was announced for the NBFCs. Additionally, threshold of default under section 4 of the IBC was increased from `100,000 to `10 million with the intention to prevent triggering of insolvency proceedings against MSMEs. Fresh admission of insolvency cases introduced for default arising after March 25 2020 under IBC, 2016 was suspended for six months (extendable by another six months) in an effort to stop companies at large from being forced into insolvency proceedings. It was also announced that loans for Covid-19 was to be excluded from the definition of default.

Post-stimulus - As part of the `20.97 lakh crore ‘Aatmanirbhar Bharat’ package, the government has been taking several measures to improve liquidity among the stressed NBFCs and HFCs. An outlookindia.com report on September 5, 2020 informed that in August, it cleared 15 proposals worth `6,399 crore allowing primary and secondary market purchases of debt to address the short-term liquidity issues of non-banking financial companies (NBFCs) and housing finance companies (HFCs).

Financial Express report on September 16, stated that the health of India’s shadow banks remained resilient in August. This suggested that record stimulus steps by the nation’s authorities are helping the crisis-hit sector ride out the pandemic. According to an index of AAA rated five-year notes, premiums on non-bank lenders’ bonds narrowed to a two-year low. Three other indicators compiled by Bloomberg, covering areas including liquidity and share performance, stayed steady from the previous month, with two at levels indicating strength.


In the month of June, PM Modi on Saturday launched the Garib Kalyan Rojgaar Abhiyaan.  ‘50 thousand crore was expected to be spent under this initiative for village development. It is also aimed at providing jobs to migrant workers under 25 existing schemes bundles together. The FM made certain new announcements on November 12 to counter the effects of Covid-19 pandemic on the economy and people. Reacting to the announcements, Niranjan Hiranandani, President, ASSOCHAM had informed businesstoday.in that the government’s continuous support coupled with the new announcements under the Atmanirbhar Bharat Yojana 3.0 will make the road to economic recovery stronger.

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