Second Stimulus Package Could Be Unveiled This Week
The government is likely to unveil a much-awaited second stimulus package and it’s expected to include a credit guarantee scheme to ease fund flows to small businesses and cash support for migrant workers, said officials with knowledge of the matter.
Contours of the package have been nearly finalised and announcements will take place in a staggered manner as the government reviews the state of the economy with the third phase of the lockdown ending on May 17, one of the officials said. The first part of the package targeted at MSMEs and migrants could come early this week, the official said. A package for services, one of the worst affected sectors, could follow soon.
Finance minister Nirmala Sitharaman and finance ministry officials have held a series of meetings with Prime Minister Narendra Modi as well as those in the Prime Minister’s Office (PMO) to confirm the contours of the package. The PMO has been keeping close tabs on details of the programme and has also been in direct touch with stakeholders.
The government has already raised its borrowing target for the current year to Rs 12 trillion from Rs 7.8 trillion estimated in the budget.
Part of this is expected to fund the stimulus. The government had unveiled a Rs 1.7 trillion package that included cash support to the poor and free ration and cooking gas just after the lockdown was imposed on March 25.
A credit guarantee mechanism that will provide comfort to banks to lend to micro, small and medium enterprises (MSMEs) and support for migrant workers are priorities that will get precedence, said one of the officials.
The credit guarantee mechanism is likely to enable borrowers to access collateral-free loans for first-time MSMEs as well as those that need working capital loans.
Public sector banks have suggested a Rs 300 billion guarantee fund that can be replenished over three-four years to provide up to 100% guarantee for loans of about Rs 3 trillion said an official with a leading bank.
However, Small Industries Development Bank of India (SIDBI) and state-owned banks may have to share part of the guarantee burden.
MSMEs have been hit hard by the Covid-19 outbreak and subsequent nationwide lockdown. Cancelled orders, delayed payments and working capital issues have made it difficult for them to pay salaries to workers and also resume operations.
Sitharaman met heads of public sector banks on May 11 to assess disbursements since March 1 as well as sanctions and payments of Covid-19-related emergency additional credit and working capital.
Union minister Nitin Gadkari on May 11 said he expects the Centre to unveil a financial package in two-three days, observing that the economic situation “was very bad” despite the three-month moratorium on loan repayments announced by the RBI. The minister for MSME, and Road Transport and Highways said the government stands with the industry but it also needs to understand the government’s limitations.
“We are trying our level best on how we can protect everybody,” Gadkari said, adding that while Japan and the US have announced mega packages, their economies are bigger than India’s.
As part of measures to alleviate hardships faced by people, the Reserve Bank, on March 27, announced a slew of steps, including a three-month moratorium on loan repayments.
Top policy makers in the government have been concerned at the challenge posed by the migrant worker crisis and the package will look to provide relief in the form of income support. In the absence of earnings and no clarity on when the situation will improve, migrant workers have returned home, many walking and cycling thousands of kilometres to do so.
Incentives could also be offered to MSMEs in the form of wage support for them to retain workers and pay salaries. “It is important to ensure liquidity and credit support to MSMEs as they have been hugely impacted,” said another official.
Experts said the higher borrowing is possibly due to a combination of lower tax collections and the fiscal stimulus needed to support the economy, though it could raise interest rates and crowd out the private sector. One of them said this would peg the much-awaited fiscal stimulus at Rs 5 trillion or 2.5% of GDP, which pales in comparison with those announced by other countries. Another expects the fiscal deficit to widen to as much as 6% of GDP.
“The above revision in borrowings has been necessitated on account of the Covid-19 pandemic,” the finance ministry said in a statement on May 8, announcing the new borrowing schedule.
The government has already announced a fiscal support package of Rs 1.7 trillion and there is expectation of a bigger stimulus programme in the days ahead, with tax revenue expected to take a big hit from the lockdown.
According to the new calendar, the government will borrow a total Rs 7 trillion in the first half of the year against the earlier plan of Rs 4.88 trillion. That means it can borrow up to Rs 6 trillion more in the period until September end. The government could borrow an average Rs 300 billion per week until then against the Rs 190-210 billion weekly borrowing planned earlier.
That leaves up to Rs 5 trillion to be borrowed in the second half against Rs 2.92 trillion estimated in the budget based on this latest programme.
“Higher borrowings are likely to push up yields, unless OMOs (open market operations) or other instruments are deployed by the RBI (Reserve Bank of India) to absorb a part of the higher issuance, and crowd out borrowings by state governments and corporates,” said Aditi Nayar, principal economist, ICRA. The benchmark 10-year bond closed at 5.97% on May 8, the lowest in over a decade.
The fiscal deficit will widen more than targeted as the government borrows heavily. CARE Ratings pegged the fiscal deficit at 5.5% of GDP given other conditions remain unchanged, as the fiscal deficit will likely rise by Rs 4.2 trillion from an estimated Rs 8 trillion.
Since the Covid-19 outbreak has impacted economic activities, which in turn will have an impact on growth, revenue and expenditure, fiscal deficit-to-GDP ratio is likely to be close to 6% of GDP,” said DK Pant, chief economist at India Ratings. The government targeted a fiscal deficit of 3.5% in the budget.
The move is likely to increase the cost of borrowing for states, which are in a similarly constrained situation, Srivastava said. However, the ample liquidity in the system may provide some relief to bond yields, according to Pant. Net surplus liquidity in the banking system stood at Rs 6.07 trillion, according to a finance ministry report on May 5.
Babita Sharma
Editor, INBA