By Sonal Varma & Aurodeep Nandi
We offer our main takeaways from the five rounds of economic stimulus packages announced in last week and their likely economic impact. In our view, the government needs to deliver its policy response in multiple phases. In the present survival phase, the cash flow shock must be addressed to prevent permanent damage to the economy. When the infection curve is under control, the government will need to step in via a demand stimulus for consumption and investment to revive growth. Fixing the financial plumbing will require recapitalisation of PSBs, and a comprehensive one-time solution to deal with the bad debt situation. Structural reforms are crucial, though they don’t address near-term challenges.
The Centre has tried to ensure survival of firms, vulnerable segments of the population, and the resource constraints faced by states. For MSMEs, 100% guaranteed loans (Rs 3 lakh crore), subordinated debt, and equity infusion provide liquidity. Raising the minimum threshold for insolvency proceedings should insulate MSMEs. Some relief has also been given to small businesses via a 2% interest subvention (MUDRA-Shishu loans) and to street vendors to enable them to restart operations.
For more vulnerable segments, the increased allocation under MGNREGA will provide jobs and income support to returning migrant workers. For farmers, additional credit worth Rs 2 lakh crore (via Kisan credit card), and an emergency working capital funding for crop loans (via NABARD) have also been provided. Support for the formal sector, however, has been limited (to EPF contribution).
Overall, we estimate total support of ~1.9% of GDP for MSMEs, of which the bulk is reflected in the Centre’s contingent liabilities,similar to the ~0.4% of GDP support offered to shadow banks (see graphic). The vulnerable populace have received ~1.2% of GDP, of which the bulk is reflected in the fiscal deficit impact. For farmers, the overall size of the intervention is quite large, though the actual fiscal outgo is limited.
Preventing bankruptcies: Fresh initiation of insolvency proceedings for a year is suspended, and Covid-19-related debt excluded from the definition of ‘default’ under IBC to give breathing space to cash-strapped firms.
Assessing credit risk: Rising risk aversion among banks and MFs has resulted in a liquidity pinch for high-risk borrowers. Guaranteed MSME loans, a special liquidity scheme for shadow banks, and the partial credit guarantee scheme for NBFCs will help address this issue. The success of the first will depend on banks’ appetite to disburse MSME loans. The scheme for shadow banks should see higher take-off, and would benefit from more allocation. Partial credit guarantee (for AA or unrated paper of shadow banks), though, may see lower interest—default risks are high for these borrowers, and a 20% guarantee may not be enough to entice banks.
Missing elements: First, some formal economy sectors—aviation, hospitality, travel & tourism—are likely to suffer from lower revenues for much longer from being required to operate at a lower capacity. The stimulus package did not offer any tax relief, interest subvention, or wage subsidy to these. Second, the banking sector’s immediate need for recapitalisation was not addressed. This, along with overall sectoral reforms and addressing the NPA crisis, is essential for medium-term growth. Third, except for the one-year extension of credit-linked subsidies for affordable housing, demand stimulus measures are missing—likely to disappoint investors looking for a growth booster. But, demand-related stimulus will become essential later; survival remains the priority now.
Reforms: The Centre’s announcement of longer-term reforms are focused mainly on agriculture and the industrial sectors. These include:
Increasing infrastructure investments in agriculture value chains, attracting private investments, enabling higher price realisation for farmers, etc
Allowing commercial coal mining, and transfer of mineral mining leases
Higher FDI in defence manufacturing (from 49% to 74%)
Privatisation of government power discoms in union territories
Not all announced reforms are new, but, the structural reforms signal that the government is looking at privatisation, and attracting more risk capital to raise India’s medium-term growth outlook.
Growth outlook unchanged: Of the Covid-19 support package of 10% of GDP, RBI liquidity measures account for 4% of GDP, while fiscal/financial/other measures amount to 6.5% of GDP. Of the latter, the bulk emanates from higher financial support via higher contingent liabilities (guarantees) at 2.15% of GDP, while net cash outgoings from the Centre’s budget (aggregating fiscal impact of all packages) amounts to only 0.8% of GDP. The government has aimed for maximum bang with minimum buck.
We expect the Centre’s FY21 fiscal deficit to slip to 7% of GDP, double the budget estimate, taking into account the impact of weak nominal GDP growth (~0.5% of GDP), lower net revenue receipts (~2.6%), disinvestment proceeds (~0.9%), and the fiscal measures announced (0.8%), which should more than offset measures to save expenditure (~1.3%). The net fiscal impulse to growth should remain low. State governments’ deficit has been allowed to widen from ~3% of GSDP to 5%, assuming reform conditions are met. The general government deficit will likely widen to 10.5-11.0% of GDP in FY21.
The Centre has raised its borrowing ceiling by 2% of GDP from Rs 7.8 lkh cr to Rs 12 lkh cr, while state governments’ borrowing ceiling has been revised higher by 2% of their GSDP, from Rs 6.41 lkh cr to Rs 10.69 lkh cr. Overall government borrowing will rise by 4% of GDP (Rs 8.5 lkh cr) in FY21. We continue to believe the Centre will announce additional borrowings, but in H2FY21.
The package largely meets our expectations. However, we believe the government will need to step in again to revive growth through demand stimulus, as well as measures to support the financial sector. In terms of the economic outlook, we expect a slow and uneven restarting of the economy. We expect real GDP growth in 2020 to contract -5% y-o-y from -0.5%, with growth to remain negative for three consecutive quarters. Our quarterly profile has growth faltering to 1.5% y-o-y in 1Q2020, before plunging to -14.5% in 2Q, and then weakly recovering to -6% in 3Q, and -1.5% in 4Q.
Edited excerpts from Nomura’s India: How potent is the economic vaccine? (May 18, 2020)
Authors are Research Analysts, Asia Economics, Nomura. Views are personal