Looks great, but is it?

The real concern is whether some of the relief measures announced on May 13 and 14 will actually materialise

At 4 pm on two consecutive days, May 13 and 14, Finance Minister Nirmala Sitharaman announced her first two sets of mega-relief measures. Titled “Atmanirbhar Bharat” (or “Self-Reliant India”), the first has much to do with businesses, with a special focus on support for the country’s micro, small and medium enterprises (MSMEs), as well as non-banking financial companies (NBFCs). The second package seeks to offer succour to jobless migrant workers, the poor and to farmers.

On the face of it, the amounts are huge. Consider just six elements of the first package. On offer are: (i) Rs .3 trillion (or Rs 3 lakh crore) of apparently collateral free “automatic” loans for businesses, including MSMEs; (ii) Rs 200 billion (Rs 20,000 crore) of subordinate debt for MSMEs; (iii) Rs 500 billion (Rs 50,000 crore) for equity infusion through an MSME Fund of Funds; (iv) Rs 300 billion (Rs 30,000 crore) as additional liquidity facility for NBFCs, housing companies and mutual funds; (v) Rs 450 billion (Rs 45,000 crore) under a partial credit guarantee scheme for NBFCs; and (vi) Rs 900 billion (Rs 90,000 crore) liquidity injection to the cash-starved electricity distribution companies (or discoms). Plus all manner of additional assistances — to contractors, real estate firms, TDS and TCS relief, and others.

Despite its sheer size, the first set of relief measures announced on May 13 has been structured with relatively little recourse to central government borrowing and its consequential impact on the fiscal deficit.

Reflect on the Rs 3 trillion on offer as collateral-free automatic loans for businesses and MSMEs. That rests entirely on the shoulder of banks and NBFCs — which are expected to extend emergency credit lines to borrowers up to 20 per cent of their outstanding credit. These emergency loans will have a four-year tenure with a moratorium on principal repayment for the first 12 months; the interest will have to be capped; no fresh collateral can be asked for; and there will be a 100 per cent credit guarantee cover on the principal and interest on such loans.

Illustration by Binay Sinha

 

Thus, in this apparently huge scheme, the only liability of the exchequer is the credit guarantee that the sovereign has offered — which will only come to bear on those loans that turn sour and become non-performing assets.

The Rs 20,000 crore offer involving equity-like subordinate debt for MSMEs also doesn’t cost the exchequer as much as the scheme itself. Indeed, all that the central government will offer is Rs 4,000 crore to the Credit Guarantee Fund Trust for Micro and Small Enterprises which, in turn, is expected to leverage this at a ratio of 5:1 to create a kitty of Rs 20,000 crore.

Similarly, the onus of financing Rs 90,000 crore to bail out discoms falls on the Power Finance Corporation and the Rural Electrification Corporation. These two entities will either have to ante up from their reserves or, more likely, go to the market and raise borrowings. The cost of this liability will lie in their books; not that of the central exchequer, and hence will not affect the Centre’s fiscal deficit in the narrow sense in which it is used in India.

Some of the schemes announced on May 13 are as yet unclear in their substance. For instance, while the finance minister said that the government will launch a special liquidity scheme amounting to Rs 30,000 crore for NBFCs, housing companies and mutual funds, nobody yet knows whether this is a new injection by the exchequer or comes out of an earlier budgeted scheme or whether this, too, will be intermediated by the banks based upon a much smaller quantum of seed money by the government.

Akin to this is the offer of Rs 45,000 crore under a partial credit guarantee scheme for NBFCs, housing finance companies and mutual funds. The 2019-20 Union Budget had announced that the government will provide one-time partial credit guarantee for six months to public sector banks for their first loss of up to 10 per cent to encourage the purchase of high-rated pooled assets of financially sound NBFCs. This was ratified by a cabinet decision taken in December 2019.

This has been now extended to cover borrowings such as primary issuance of bonds and commercial paper, with the first 20 per cent of loss in such transactions to be borne by the Central government. Two things are worth noting. First, it is part of an existing scheme in the Budget with its scope being enlarged somewhat. And second, the amount on offer from the government — that is, the cost to the exchequer — is far less than the claim that it will generate Rs 45,000 crore of additional liquidity.

Narrow fiscal purists ought to be happy with the first package for it promises much relief with very little recourse to the central government’s funds. Parenthetically, it is a different matter that if the fiscal deficit were to be calculated in a broader manner, many of the numbers would show up in the estimate. But that’s not my criticism here. A severely constrained exchequer has done what it must do — pass the burden on to other entities or slot these into existing Budget programmes. My criticism is with the tonality of the messaging. Big numbers have been put right up front when in fact the actual outlays are significantly smaller. And much of the media has played up to the big numbers hype, without getting into the details.

My real concern is whether some of these relief measures will actually materialise. Think of an MSME entrepreneur who used to do business of Rs 1 crore per year, going to a public sector bank and asking for the reliefs offered by the finance minister. What do you think will happen? Will this poor cash-strapped fellow be immediately offered the help that we have been told on May 13 is his to get? Or will he be taken on a procedural wild goose chase by a bank manager who will only take such a decision if every bit of the process is categorically set out in a detailed bank notification, if that. I believe it will be much more of the latter. The finance minister believes in the former.

Concerns regarding implementation become even more acute in the second package of relief measures announced on May 14 — where the direct financial outlay of the Central government is quite significant. Consider the excellent scheme costing Rs 3,500 crore where the central government aims to supply migrant labourers 5 kilograms of grain and a kilogram of chana per person free of cost for two months. This involves 80 million migrants now in various parts of India. Given the complicated supply chain of publicly-distributed foodgrain, how many ration shops will be able to cope with this demand? Moreover, how many of these 80 million migrants will have a valid ration card at their disposal?

Similarly, a special credit facility in the form of working capital loans of up to Rs 10,000 per person has been mooted for street vendors, which is estimated to cost Rs 5,000 crore. Who will provide them these loans? Will these be collateral free — for what collateral do these vendors have except their cart and their daily wares? Can you imagine bankers giving such loans to the subzi-walla, the phal-walla, the istri-walla, the kabaadi-wallah, the thanda-paani-wallah or the chaku-chhuri-dhaar walla? Or that they will have a digital payment mechanism to avail of this benefit?

Finally, here is my take on the first two schemes. The first burns up little from the exchequer, and several of the measures can be implemented — though I doubt whether in full, or near what the finance minister believes will be the eventual monetary benefit. The second actually involves more fiscal outlays, but to the extent that these offer help to migrant workers, I fear that there will be many implementation hiccups. However, these don’t take away from the finance minister’s good intentions. And so, I pray that she succeeds. The odds are tough.

The author is chairman, CERG Advisory Private Limited