Finance minister Nirmala Sitaraman on Thursday met Prime Minister Narendra Modi amidst rising demand for a ‘fiscal relief package’ to addresses acute distress faced by industrial and service sector as well as the economically disadvantaged section of the society. Sources in the government have told India Today that a financial relief package is in the offing. They, however, have added that the PM Modi-led government may not go for one big-bang package but instead announce a series of ‘booster doses’ for sectors and segments in a phased manner.
While the RBI is likely to announce monetary moves like working capital relief for MSMEs and others, the government may go step by step as it would not want to waste its firepower in a dynamic situation dictated by the novel coronavirus spread. The PM is expected to take a final call on proposed measures.
In a first clear admission, one of the core team officials admitted that though the lockdown has been extended for 19 days, restrictions may not be completely lifted after May 3. “The pandemic and restrictions may not vanish completely by the end of the first half of this year. This may lead to longer spells of containment, tough financial conditions, and gaps in supply chains,” the source said. Former CEA Arvind Subramanian had earlier stated that the government’s mitigation effort against the crisis created by the pandemic will involve spending 10 trillion, which is equivalent to 5% of India’s GDP.
PROPOSALS ON THE PM’S TABLE
The biggest crisis unfolding due to coronavirus pandemic is in the small and medium industries. Manufacturing, other industries and services account for 42% employment in the country and almost 70% of the GDP. A senior government advisor told India Today, “The Centre plans to avert a situation in which cash crunch converts itself into insolvency for small and medium scale industries. Their balance sheets are in tatters and they may belly up by the time the extended lockdown ends.”
The government is actively considering addressing both the supply and demand side of the crisis. Sources say fiscal relief measures may have strong elements to address the work force and migrants like those who resorted to protests in Surat or attempted to return to their native places in large numbers in Mumbai and Delhi.
A) One of the earliest moves in the series of measures may come from the RBI. The Centre’s fresh lockdown guidelines include relaxations aimed at restarting the economy from April 20 onwards.
To ease monetary pressure and cash flow for small, medium and other industries, the Centre recently had announced a 3-month moratorium on working capital loans. At the end of three months, the deferred interest (of three months) will be due immediately after the moratorium ends.
There is a proposal to extend this moratorium for a period of six months. Various measures like cheaper lending and softer loan servicing are said to be in the works.
B) The key proposals on government’s agenda could be ‘payroll support’ for employees for small and medium industries. Source say that both central and state governments have data available on these units and on persons employed. Payroll support has the potential to immediately address the large scale retrenchment and job losses which are being reported causing hardships
Payroll support via DBT will reduce the burden on small and medium business and put money in the hands of labourers which can trigger demand for goods produced by industries and businesses which are expected to start working with social distancing protocols after April 20
C) The other proposal is about reducing the fiscal burden of small and medium enterprises during the lockdown by taking care of various ‘fixed expenses’ incurred by small and medium industries. For example, this includes fixed electricity charges they have to pay to the discoms at a time when their operations are suspended.
D) For service sector too, the government is considering providing relief. A senior official tod India Today, “Services sector is a huge employer. Unlike manufacturing, they can’t recover losses they have incurred during the lockdown. For example, airlines and hotels can’t make up for the seats and rooms not sold in this period. They need help as most airlines have already announced salary cuts for employees or sent a certain percentage of them on unpaid leave.
E) If payroll support is a helping hand for small and medium enterprises, the government is actively working on a proposal to augment demand. A senior official said, “The government has to put money in the hands of the poor and needy.”
The target of the proposal is expected to be the bottom 30-40% of the economic strata. This includes daily wagers and migrant labourers. Ex-finance secretary Subhash Chandra Garg, in an article recently, estimated that the government needs to spend nearly 60,000 crore to provide at least 2,000 direct cash transfer to nearly 10 crore workers for three months.
The ongoing PM Garib Kalyan Scheme involving direct cash transfer to women Jan Dhan account holders and foodgrain distribution could be expanded to beef up relief for the crisis period.
F) There is a radical suggestion proposed by government’s advisory mechanism to use the crisis to create a uniform GST rate instead of multiple tiers. A senior government official said many segments like automobile industry face high tax slabs and a reduction in the GST slab to a 12-15% uniform level. This is expected to make items cheaper and boost sales, which in turn will help manufacturers sell greater volumes and recover losses. But this move will need the nod of the states. States get a large chunk of their individual revenue from official liquor and fuel sales.
India’s fuel consumption slumped by over 66 per cent in April as a nationwide lockdown halted economic activity and travel, which eviscerated demand. In April, petrol and diesel demand has plummeted by 66%. Aviation turbine fuel (ATF) consumption has crashed by 90% as most airlines have stopped commercial flights and only cargo freight or evacuation operations are on.
Since retail selling is down to essentials, the GST collection which brings other chunk of state revenue is also expected to plunge. That’s why states may not readily agree to the proposal.
G) The government has to look at where it will get the money to foot the staggering cost of a fiscal relief package while it is suffering a huge revenue loss. Former chief economic advisor Arvind Subramanium had recently recommended five routes for the government to finance additional expenditure over a period of one year. This included the government borrowing directly from the RBI or monetising debt.
The IMF, in a rare departure from the past, did not bat for fiscal prudence first over spending by the government. IMF chief economist Gita Gopinath in a blog said, “The large, timely, and targeted, fiscal, monetary, and financial policies already taken by many policymakers —including credit guarantees, liquidity facilities, loan forbearance, expanded unemployment insurance, enhanced benefits, and tax relief— have been lifelines to households and businesses. This support should continue throughout the containment phase to minimise persistent scars.”
It’s not clear whether the government will throw fiscal prudence to wind and go for a radical step of simply printing more money to fund its battle.
Prime Minister Modi, preempting a crisis, had set up 11 empowered committees with specific mandates that included presenting proposals for repairing the economy post Covid-19 outbreak and a long drawn lockdown. The committees had industrial and corporate bodies like CII, FICCI, and Assocham as participants. The CII, through a 54-page long exit plan, proposed a calibrated and safe exit from the lockdown, subject to geographical spread of Covid-19 in the country. But prior to the lifting of the lockdown, the CII demanded that there should be announcement of a two-fold economic package.
The FICCI had also submitted a long wish list that included suggestions for ease of doing business, cash flow support, tax issues and sectoral impact covering 23 kinds of business and industrial entities. The industry body said there is an immediate need for a stimulus of as much as 9-10 trillion. The proposals sought an elaborate fiscal expansion directed towards the bottom of the pyramid and enhanced credit to industry through banks.
The proposals highlighted the need for attending to distressed sections of the population apart from targeting increasing credit off take to at least 14 to 15% by the year-end. Experts and think tanks like the Niti Aayog have suggested that banks should be asked to provide additional working capital to all companies, equivalent to their three-month salary/wage bill at an interest rates between 4% to 5% and this working capital should be guaranteed by the government so that it can step in and back stop the banks in case the companies fail to pay.
There has been an outcry for additional working capital to manage interest obligation of stressed sectors like construction, aviation or tourism.
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