10 Stimulus announcements that could have a multiplier effect

With most of the stimulus being routed through the RBI and the commercial banks, the actual impact on the budget would be less than 3% of GDP. Here are the 10 announcements that could have a multiplier effect on the economy.

May 19, 2020 12:17 IST | India Infoline News Service
On May 17, 2020, Nirmala Sitharaman outlined the final tranche of the stimulus package and also accounted for the outlay. The fiscal and monetary outlays added up to Rs21 trillion. This does not include the future monetary measures taken up by the RBI. It also does not include the additional fiscal outlays that may be necessitated if the lockdown gets extended.

While the overall package of $275 billion is more than 10% of GDP, the actual budgetary impact will be much smaller. With most of the stimulus being routed through the RBI and the commercial banks, the actual impact on the budget would be less than 3% of GDP. The more important question is about disruptive announcements. In fact, there are 10 announcements that could have a multiplier effect on the economy.

1. Special Package for MSMEs

The Finance minister announced collateral free loan of Rs300,000cr for 45 lakh MSMEs to restart work. In addition, there would be subordinated debt provision of Rs20,000cr and an additional Rs50,000cr of equity fund infusion via the FOF route. This could be critical considering that MSMEs account for 40% of GDP and over 55% of exports going out of India. Their contribution to job creation is still larger.

2. Look inward and Make in India

The FM wants to reserve small contracts for local players and shall restrict global tenders up to Rs200cr of government contracts for Indian bidders only. Private sector will get to participate in commercial mining of coal and bauxite offering a big boost to the private sector. 500 mining blocks of coal and bauxite will be offered through auction process.

3. Special thrust for the NBFCs and MFIs

Even as the stress continues despite the TLTRO 2.0, FM has allocated Rs30,000cr special liquidity scheme for investing in investment grade debt paper of NBFCs, HFCs and MFIs. The kicker is that these will be fully guaranteed by government of India. In addition, there will also be an Rs45,000cr partial credit guarantee scheme for NBFCs.

4. Time to get DISCOMS back in shape

Power distribution companies (DISCOMS) will get a one-time emergency liquidity injection of Rs90,000cr against their receivables. These will be guaranteed by the respective state governments and liquidity provided by REC and PFC. That should address the short term liquidity challenges for DISCOMS.

5. Realty projects to get more time; legitimately

The FM has offered an extension of 6 months (without costs to contractor) for all Central Government agencies including Railways, Ministry of Road Transport & Highways, Central Public Works etc. On realty projects, the Ministry of Urban Development will issue advisory to states to invoke force majeure for COVID-19.

6. Addressing migrant workers and street vendors

One nation; One ratio card will be applicable from August 2020, benefiting 67cr persons. Migrant workers without NFSA cards get 5 Kgs of wheat or rice per person and one kg channa per family per month for next two months. Government has also allocated Rs5,000cr for giving working capital loans to street vendors. This will ensure quick economy restart and also ensure that supply chains are not blocked.

7. Targeting accommodation for all

FM announced a special scheme for rental housing for migrant workers by converting state funded houses into affordable renting accommodations for migrant workers. It will be done on a PPP basis. Credit-linked subsidy scheme for middle income households to create flows of Rs70,000cr in housing and boost sectors like steel and cement.

8. Big push for agriculture and post-harvest

FM announced Rs30,000cr additional emergency funds through NABARD for post-harvest Rabi and Kharif activities for small and marginal farmers. FM also announced Rs100,000cr for strengthening farm gate infrastructure. Post-harvest infrastructure has been the biggest bottleneck for Indian farm production and that is being addressed.

9. Meaningful foreign participation

While indigenizing important spares in defence production, the FDI limit in defence manufacturing under automatic route was raised from 49% to 74%. Government is also moving towards corporatizing Ordnance Factory Board and get foreign participation. India will also be positioned as an MRO hub for aviation companies. All hitherto PSU sectors to be opened for private participation, except strategic sectors.

10. No hounding for now
This may be slightly controversial, but Covid-related debt had to be excluded from definition of default under the IBC. Government has also promised no fresh insolvency for next one year. Importantly, most violations under the Companies Act are being decriminalised.
One can debate about the quantum and the thrust of the policy package. We can remonstrate that exports were missed but a boost to MSMEs is effectively a boost for exports. It is now for the lockdown to be lifted and business to get back on track.

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