The inside story of how the govt's Covid-19 package was worked out

Large-scale reshuffles, pressure from various stakeholders and need to revisit all the budget numbers delayed the response

In the five-part economic package of the central government announced last week by finance minister Nirmala Sitharaman, the decision to allow only domestic companies to bid for government tenders of Rs 200 crore or less came pretty late. Since it sat well with the government plan to promote “local”, it was nevertheless picked up. 

“In the past two months since April, all elements of the package were going up and down between the finance ministry and the PMO. By the time this bit (the decision to go local for small tenders) was finalised, the package was more or less ready,” said a senior official aware of the developments. The final package bill is estimated at Rs 20,97,053 crore by finance minister Nirmala Sitharaman. 

“It became obvious that we shall be presenting a sort of fourth budget in the span of one and a half year,” said the official. (February 2019, interim budget; June 2019, first budget of new government, February 2020, second budget)

The mini budget was initially meant to address the woes of the small scale sector (MSME), said another official. It was in the works since late March once the lockdown came into effect. The necessary cabinet approvals were also secured pretty early on. For instance, the plan to offer a Rs 20,000 crore subordinate debt to the stressed MSME units needed a cabinet approval since the government was to offer seed money for the scheme of Rs 4,000 crore. 

From one sector to many

The government interventions started looking like a package to the officers involved from mid-April, when it became clear that a relief plan for the migrant workers was also going to be most necessary. Representations from business sectors affected by the Covid-19 pandemic had already begun to pour in and it became apparent that a single large-scale response had to be crafted.  

By then there had been a large-scale reshuffle at the top levels of the finance ministry. While T V Somanathan was already there as expenditure secretary from mid December, he had obviously not got the time to influence the union budget since it was presented just one-and-a-half months after his arrival, on February 1. But the economic package had his stamp all over it. Meanwhile, Debasish Panda had replaced Rajiv Kumar as secretary in the department of financial services on his retirement at the end of March, while Tarun Bajaj became secretary, department of economic affairs from May 1, when Atanu Chakraborty retired. Bajaj and Somanathan had worked together for quite some time in the  Prime Minister’s Office in Narendra Modi’s first stint. 

“On many days you shall often find them in each other’s rooms,” said an old finance ministry hand. 

In recent years, despite the Prime Minister’s admonition to senior officers across ministries to break silos, the camaraderie at the first floor of North Block had visibly waned. The rediscovered rapport has made it easy to take inter-departmental decisions as part of the package. For instance the negotiations with the World Bank for a $1 billion loan to support India’s efforts at “providing social assistance to the poor and vulnerable households” was secured in a record time of few days, due to the pooling in of forces by both DEA, which is the nodal department to deal with multilateral institutions and the expenditure department, which would utilise the loan. It came in just days before the finance minister was to announce the package. The Bank was surprisingly doubling its commitment in less than two months. As its press release put it, “This takes the total commitment from the Bank towards emergency Covid-19 response in India to $2 billion. A $1 billion support was announced last month (April) towards immediate support to India’s health sector”. Incidentally the Washington DC based institution too has a vast bureaucracy that often slows down speed of approvals considerably. 

Other changes happened. For instance, the plan to help the migrant workers had to be converted to an additional allocation of Rs 40,000 crore to the MGNREGA budget once it was realised they would be too late to enumerate all the out of work people before they began to return on trains to their respective states. 

“Once the size of the interventions for the MSME relief package was calculated it became obvious that we were onto something big. It was already Rs 5,60,000 crore (Rs 5.6 trillion). Add the government intervention in the first phase of Rs 1,70,000 as Garib Kalyan Package plus the health support of Rs 15,000 crore, and it was obvious that we were onto something sizable,” said one of the officials. 

A crucial input in this phase was the transfer of A K Sharma, additional secretary in the PMO on promotion as secretary of the ministry of MSME. It changed the pace of decision making in the ministry. Cash strapped MSMEs pleading for settlement of their pending dues had lost faith with the ministry and turned to the finance ministry for support. Sharma agreed to take back the brief from the finance ministry and push the PSUs to give refunds to MSMEs.   

Since the support for the MSME was also linked to reforms, the government managers in both the finance ministry and the Prime Minister’s Office decided to set the same standards for the other sectors. Secretaries in each ministry had already sent in their reforms wish lists, which the PM went through in details with them to include in the package of measures. It was also decided that there shall be no sectoral tax relief, considerably reducing the workload for finance and revenue secretary Ajay Bhushan Pandey. There was simply no money to offer any, said one of the sources. 

Sequencing the changes

“We had to also take a call on the borrowings for the year. It was quite apparent that the annual aggregate debt receipts of Rs 8.49 trillion in the budget estimate was not going to hold”, said an official. Even without offering any tax relief to any sector and a proposed cash support to the migrant workers the government would still need to borrow much more. Not just for health and related sectors. it would be needed to finance infra spending and bank recapitalisation. The open ended expenditure of a country wide train network to ferry workers home would also have to be made good. Most of the pages of the expenditure budget has been redrawn, which would be presented for approval to Parliament in the monsoon session. 

The official also explained that it was necessary to get RBI on board with the enhanced borrowing, as the last tranche announced by Sitharaman was to include permission to states to also borrow more. Without a clarity on the aggregate borrowings by the centre, the markets would have got a bad surprise. “There was a considerable debate on whether to link the additional borrowings to reforms. Once RBI was also okay with it, we felt confident”. The centre has allowed states to borrow up to 5 per cent of the GDP instead of the existing three per cent, but linked most of it to reforms like the in power, in raising of property tax, introduction of a pan national ration card. 

It was a supply side response to the pandemic. While Niti Aayog pitched for a demand side measures too like a rise in PM-Kisan, the consensus within North Block was that a dole like response would not work at this stage. So a financial support for different segments of the population in addition to the ones already in place would have to wait some more.