Rs 20 lakh crore Covid-19 relief package: Missing demand

The package has a large role for RBI, with 40% of the amount mentioned being provided as liquidity by the central bank.

What is one to make of the Rs 20 lakh crore economic package? First, it is not a package that exclusively tackles the immediate fallout of the Covid-19 pandemic. Second, it addresses the larger issue of reforms in various areas—agriculture, mining, FDI, the power sector, and so on. Third, it does not provide any demand-side stimulus, which was expected given that the announcement of the package had mentioned everyone being included. Fourth, it depends heavily on financial institutions (FIs) to deliver the goods, and is, hence, follows more of a supply-side approach. Fifth, there is something for the really poor, but with limits, as the relief is time-bound and not for the full year. Therefore, for the population that is being provided with money and employment through MGNREGA, a lot will depend on when the economy will recover—the 100 days’ wages address the need of only three months, whereas many had virtually permanent jobs, earning anywhere between Rs 10,000-30,000 per month against the Rs 6,000 receiveable under the scheme.

From the standpoint of corporate India, it would be a disappointment as several sectors—especially, aviation, tourism, etc, for whom recovery is improbable this year—were expecting tax breaks, loan guarantees, and funds for resuscitation. The government has taken a macro view, addressing needs from below, including those of SMEs, but not the onus of alleviating the pain of industry, which is the key driver of the economy.

The package has a large role for RBI, with 40% of the amount mentioned being provided as liquidity by the central bank. This is an indirect way of supporting the economy: RBI can infuse liquidity in banks and nudge them to lend at a lower cost by altering the repo rate, but the final call is to be taken by banks after evaluating risk, which is going at a premium today given the inability of the majority of sectors to operate during the shutdown. The government has often used this formula—of allowing for more liquidity through RBI and restructuring debt to ensure production can proceed—to revive the economy. The advantage this time is the government’s assertion that Rs 3 lakh crore of SME loans will be guaranteed by the sovereign—this should enable banks to lend, though the fine print on this is yet to be revealed. The time-frame goes up to October, meaning that borrowers must have an appetite for such loans. The challenge really is that SMEs, which have been impacted the most, would need to start production to feel confident of taking loans. This means there needs to be demand, which is lacking today. Therefore, an externality has to be solved for this to happen.

The announcement of the components of the package in tranches, across five days, did have a touch of drama. There was, however, a method to this rather elaborate unveiling. As one moved from the first to the last component, the focus changed to medium- and long-term reforms, instead of immediate relief or stimulus against the pandemic.

Strengthening agriculture has always been a goal, and the allocation of Rs 1.5 lakh crore under different schemes is spread over two to three years. The issues of mining and minerals, as well as airspace, are far-reaching in terms of reform, but presently, individual companies may not be too eager to get into such projects when the challenge is of survival. The same holds for the privatisation of discoms in Union Territories. Improvements in the business environment are always welcome, and less onerous laws under the Companies Act are suited to this.

Hence, only the first two tranches are to have an impact on the current situation. There has been some funding for street vendors and migrant labourers, but this will, at best, be in the form of sustenance. Central and states governments have to urgently take up rehabilitation of migrant labour. A plan has to be drawn up to bring them back as they cannot live on MGNREGA or agriculture, from which they had moved away to begin with. This is one of the two gaps to be filled for the economy to resume as labour shortage will be a hurdle going ahead, especially for construction, factories, retail malls, etc.

The other issue to be taken on jointly is that of logistics. Even today, states do not want their migrant population back for fear of spreading the virus—this is also the issue with supply chains. Presently, even manufacturers of essential goods have to deal with panchayats, municipal organisations, and state governments (based on their stance on opening up the economy) forcing them to close. This is serious, and needs be resolved lest the lifting of the lockdown becomes more haphazard—just as the detention of migrant labourers for 45 days before being allowed to go back has only caused large-scale trauma.

Banks and the capital market would play a vital role in the road to recovery as most of the schemes involving funds that have been spoken of are to come from FIs, banks, and the market. Some, like NBFCs, have guarantees attached while the PSUs have to borrow in a big way to address the issue of financing of receivables of discoms. The conundrum for banks is that while a lot of push has been given to supplying funds, with guarantees being thrown in along the way, there are no measures to stimulate demand. The package is not Keynesian in nature, but more a set of survival measures. Banks will be reading the fine print all through since they have to be assured that the guarantee given by the government for SMEs is for the entire time period. They already have to deal with the moratorium given to borrowers, which has to be extended for at least another two quarters as it is unlikely that those who were unable to pay by March will be able to do so by even September. The spectre of NPAs increasing will surely dominate their vision all through the year.

The author is Chief Economist, CARE Ratings. Views are personal