Not Well Thought Out Stimulus Package

The last full one week of the lockdown 3.0 were marked by the Finance Minister Nirmala Sitharaman’s announcements on the fiscal stimulus package. While she gave away details of the package after the markets closed, the Singapore Exchange Limited (SGX) Nifty crashed over 1% every time she announced new set of details.

Why are the stock markets disappointed with the stimulus package?

Probably many, including top economists don’t think of it as a stimulus. “I am not sure whether I can call these stimuli", Nitin Gadkari said in his interview to CNBC TV18. Govinda Rao, member 14th Finance Commission said "More than Rs 5 lakh crore are pending dues of MSMEs. If only they clear those dues it will be a great stimulus!"

In all, the Centre has rolled out the Rs 20 lakh crore stimulus package -- the idea of which was announced by Prime Minister Narendra Modi with much fanfare.

While this comprises 10% of the GDP, as committed by the government, how much is this actually costing the government? Less than 1% of GDP for FY21. Yes, the actual fiscal cost for the government for 2020-21 won’t be anything more than Rs 2 lakh crore.

Many of the measures announced by the government are just contingent liabilities for the government.

But an overwhelming majority of measures address the woes on the supply-side at a time when the pain point of the economy is on the demand side. 

The biggest component of the stimulus package is the credit guarantee for micro, small and medium enterprises (MSMEs), amounting to Rs 3 lakh crore -- a contingent liability for the Centre. Initially, PSBs will be pushed to give credit.

Any defaults will become government liability only after four years and it can choose the recap bonds route if NPAs rise at that time. While this makes lending for banks safe, the cost of funds for MSMEs is unlikely to come down -- which would, in turn, increase the operational costs of these units.

If banks try to reduce the interest rate below 4%, as demanded by SMEs, they would have to link these four-year loans to three or six-month treasury bills, leading to asset-liability mismatch.

Another big-ticket measure is Rs 90,0000 crore injection into Discoms. However, this equity injection would be against their receivables -- a short term asset for these Discoms. 

As this equity injection is essentially infusing the long-term money in lieu of short-term money, this will cause a lot of problems in the working capital management of these Discoms.

The cut in the TDS rates will be applicable to all contracts and professional fees.

This move is expected to release Rs 50,000 crore liquidity into the system. This is just a measure to increase the liquidity in the hands of the taxpayer. The move may also potentially reduce any tax refunds that may arise in the tax returns. However, the actual tax which will be due can be paid as advance tax or self-assessment tax, according to tax experts. 

On May 16, the government announced a slew of governance ‘reforms’, which were either a new push to old reforms proposals or an aggregation of earlier decisions.

Take, for example, the decision on commercial mining of coal, which is a two-year-old move.

A way to auction coal mines/ blocks for sale of coal under the provisions of the Coal Mines (Special Provisions) Act, 2015, and the Mines and Minerals (Development and Regulation) Act, 1957, was approved by the government in early 2018 and an order was issued on February 27, 2018.

After this, the Coal Ministry had said it had identified “15 large coal blocks” for the pilot round of bidding in December that year. Earlier in January, the Cabinet had cleared an ordinance to open commercial mining in the coal sector.

On Sunday, the Finance Minister said that she would allocate further Rs 40,000 crore to projects under the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) in a bid to address the need for more work including returning migrant workers during the Monsoon season as well.

This means the migrant labourers, going forth, will have incentives to work in their hometown, rather than coming to the urban centres, where they see a spike in their cost of living. This, in turn, puts mega-urban infrastructure projects in limbo as there will be escalation in the cost of labour. And this is where the government was planning a big infra push of Rs 100 lakh crore in the coming five years.

While many of these measures might have disappointed the markets and economy, but one measure struck a chord with the nation: one nation, one ration.

This will compel many migrant workers, who were fence-sitters till now will prefer to stay in their hometown than at their places of work after their tiring and pathetic exodus. The government could consider suggestions for direct transfer of cash to unemployed workers, including migrant workers, to compensate them for loss of livelihood in the wake of more than 50 days lockdown to curb spreading of coronavirus infections. The government would have served well if she could protect lives and livelihood by cash transfer, arranging regular meals than giving them grains and flour which requires cooking. Again for cooking it requires money.  Humanitarian assistance, the need of the hour the Modi government failed to respond.