Industry body CII on Friday suggested that the government should immediately announce a stimulus package of Rs 15 lakh crore, or 7.5 per cent of the GDP, observing that the COVID-19 pandemic has led to "deep distress" in the Indian economy.
"The COVID-19 pandemic, which came as a bolt from the blue, is hitting economies around the world very hard. And India hasn't been an exception to this crisis, with the Indian economy likely to witness a contraction this year," CII said in a report.
A substantive stimulus is required from the government in the form of support to the poor and to the industry, especially MSMEs, it said, adding that the pandemic itself is expected to persist till the time a cure or a vaccine is found, which may be 12-18 months away.
"The recovery process is also expected to take around two years, at the least. Therefore, the fiscal stimulus is needed immediately," said CII.
In order to finance the broad elements of the stimulus package laid out above, the industry body suggested Rs 2 lakh crore support from the subscription of government paper by the RBI, taking into account that inflationary pressures remain muted in view of depressed demand conditions.
An equivalent amount of Rs 2 lakh crore can be borrowed by the government from secondary market, so that bond yields remain moderate, CII suggested.
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A substantial reduction in expenditure of around Rs 4 lakh crore is also possible by reducing some of the discretionary expenditure such as centrally sponsored schemes. These are some avenues that would finance the package, it said.
"With economic activities being restricted for over 50 days now, the negative impact on the economy is expected to be even more significant than what we had earlier anticipated. This needs to be offset by a large fiscal stimulus so that jobs and livelihoods are protected. CII recommends the government to announce an immediate stimulus package of at Rs 15 lakh crore, which translates into 7.5 per cent of GDP," CII President Vikram Kirloskar said.
The Confederation of Indian Industry (CII) said the broad elements of the stimulus may include cash transfers amounting to Rs 2 lakh crore to JAM account holders, in addition to the Rs 1.7 lakh stimulus already announced.
A key fall out of this economic slowdown would be the human cost in terms of loss of jobs and livelihoods, which need urgent government intervention, said Chandrajit Banerjee, Director General, CII.
He said it should be ensured that the migrant labourers are kept within the purview of the proposed cash transfers.
In order to provide enterprises the immediate support to pay salaries to their workers and avoid any job losses, CII has suggested a provision of Rs 2 lakh crore for additional working capital limits to be provided by banks, equivalent to April-June wage bill of the borrowers, backed by a Government guarantee, at 4-5 per cent interest.
To support the estimated 63 million MSMEs which have been battered by the pandemic, CII has suggested a credit protection scheme for MSMEs whereby 60-70 per cent of the loan should be guaranteed by the government, i.e. if the borrower defaults, government should repay the bank up to the amount it has guaranteed, so the risk to the lender is limited.
This will encourage the banks to lend to the ailing sector so that their working capital needs are met, the industry body argued.
In addition, CII has suggested the creation of a fund or SPV with a corpus of Rs 1.4-1.6 lakh crore which will subscribe to NCDs/Bonds of corporates rated A and above.
The fund can be seeded by the government contributing a corpus of Rs 10,000-20,000 crore, with further investments from banks and financial institutions. This will provide adequate liquidity to industry, particularly the stressed sectors such as aviation, tourism and hospitality, CII said.
In order to create a significant multiplier impact on boosting demand in rest of the sectors and enhancing long-term productivity, funding public infrastructure has been found to be a potent option.
In this regard, we suggest an allocation of Rs 4 lakh crore be made on a public works programme that will create job opportunities, said the industry body.
It suggested that the works should be initiated with the involvement of state governments, so that implementation bottlenecks can be overcome. Specifically, the spending can begin with the completion of projects that have already begun, such as roads which are stalled after 80 per cent of the job is complete.
CII has also suggested an allocation of Rs 2 lakh crore to be earmarked for bailing out state-run electricity distribution companies that have been accumulating losses and burdening the state-exchequer.
Further, to protect our financial sector for meeting the credit needs of the real sector, as well as absorb some shocks from potential insolvencies in the real sector, an allocation of Rs 2 lakh crore for bank recapitalisation is required, it said, adding that this will help public sector banks manage any surge in their NPAs.
Clearly, time is running out for a fiscal stimulus package to rescue the economy. Delayed fiscal relief for enterprises reeling under the lockdown will make it harder for them to recover," Banerjee said.