Last week, Finance Minister Nirmala Sitharaman announced yet another dose of stimulus – a Rs2.65-trillion Atmanirbhar Bharat 3.0 package. The backdrop of the latest package is very different, with many of the high frequency indicators showing that the Indian economy is on the mend.
Tax collection in October crossed Rs1 trillion; industrial production entered positive territory in September after contracting six months in a row; and exports grew in October. What’s more, bankers are seeing the graph of loan repayment moving northwards and the number of borrowers seeking loan restructuring is far less than what they had anticipated after the six-month moratorium on loan repayment ended in August.
Technically, Indian economy has entered into a recession as it has contracted for two successive quarters, but the degree of contraction seems to be less than what most had expected. The latest Economic Activity Index of the Reserve Bank of India (RBI) pegs the GDP contraction in the second quarter of current financial year at 8.6 per cent – lower than what its October monetary policy estimated (9.8 per cent). Rating agency Moody’s Investors Service has revised upward India’s GDP forecast for calendar year 2020 to 8.9 per cent contraction from 9.6 per cent projected earlier.
Meanwhile, Fitch Solutions, an affiliate of Fitch Ratings, has pared its estimate for India’s fiscal deficit in the current financial year to 7.8 per cent of GDP from 8.2 per cent predicted earlier, anticipating higher revenue receipts and lower government spending.
The finance ministry has already started the exercise for the third Budget of the Modi 2.0 government in February 2021; this could be the last stimulus package before it. Is it the right booster dose at this point when opinions are sharply divided on whether the momentum of consumer demand will continue beyond the festive season? The reactions from politicians to this package are in sync with their affiliations, while most independent analysts see these fiscal measures as tinkering.
Although the size of the package is Rs2.65 trillion, the fiscal cost it entails is roughly Rs1 trillion. More than half of the package, close to Rs1.46 trillion, is meant for production-linked incentives to 10 sectors. Indeed, this will boost growth and create employment but we need to wait for years to see the results. The second largest component is fertiliser subsidy (Rs65,000 crore). Looking at the size of it, I wonder whether it is also meant for clearing past dues to producers.
By a liberal estimate, the Rs29.88 trillion three-package stimulant (inclusive of the RBI’s liquidity measures), announced between May and November, roughly translate into a fiscal stimulus of 2.3 per cent of GDP — far lower than what most Covid pandemic-affected nations have been willing to spend. Subsidies and dole constitute a large part of these packages; they are more welfare measures than stimulus. And, since the capital spending outlined in the current year’s Budget has not been happening, to a large extent, these packages are compensating for that.
The best part of Atmanirbhar Bharat 3.0 package is the extension of the Rs3 trillion Emergency Credit Line Guarantee Scheme (ECLGS).
# It has been extended till March 31, 2021. Originally, it was to close in October 2020 and later got extended to November-end.
# The repayment period is being stretched from four years to five, with a one-year moratorium.
# The scheme now covers companies with outstanding credit of Rs500 crore in 26 stressed sectors, identified by the KV Kamath Committee.
The original scheme was meant for any business unit – it may or may not have the MSME tag – with a Rs100 crore turnover and Rs25 crore outstanding bank credit as on February 29. They could get up to 20 per cent of their outstanding debt as fresh loan from the banks. This pegged the maximum fresh credit for one unit at Rs5 crore. Any unit that had not delayed paying an instalment for its existing loan beyond 60 days was eligible for this facility.
Later, the turnover limit was raised to Rs250 crore and outstanding back credit limit to Rs50 crore. Now, the government has done away with the turnover clause and the criterion for choosing such borrowers is only the outstanding credit limit – Rs500 crore. At 20 per cent, each stressed company can get Rs100 crore fresh bank credit.
Till 12 November, bankers disbursed Rs1.52 trillion to 6.1 million borrowers. The sanctioned amount has been Rs2.05 trillion. One of the reasons for extending the scope of this scheme could be that half of the package has remained unutilised. Even if that’s the case, this is the best part of the latest package.
Very few MSMEs have a direct interface with the customers. They supply products to companies, many of which have not been in the best of health and unless these companies are back on their feet, the MSMEs’ woes will continue. The new package will take care of those relatively larger companies to which MSMEs supply goods. So, this will help the MSMEs recover fast beside serving as a lifeline for many corporations in the stressed sectors. In some sense, it’s a 20 per cent equity infusion by the government. Once they return to activities, the government’s tax collection will rise and there will be a positive impact on many layers of the economy. This will also lessen the pressure on banks for restructuring loans.
If we presume that Rs1.5 trillion bank credit will be disbursed to companies with Rs500 crore exposure each, at 20 per cent, the system’s overall exposure to these companies will be Rs7.5 trillion (Rs1.5 trillion divided by Rs100 crore [to be given to each company) multiplied by Rs500 crore [each company’s exposure to banks]). Even if 10 per cent of this exposure turns bad, the banks would need to provide for Rs75,000 crore, which is far less than one quarter’s operating profit of the listed banks. And, all loans will not turn bad at the same time. Moreover, most banks have made adequate provisions for the legacy bad loans. Their balance sheets are far more resilient now than two years ago.
Critics may say it’s postponing the inevitable, but considering the ground reality, this is par for the course.