Macro-Economic implications of Covid-19 and way ahead

#Dr.Radhika Pandey (Consultant, National Institute of Public Finance and Policy)

India’s GDP for the Oct-Dec quarter was 4.7%. For Jan-March quarter, the growth was a modest 3.1%. For the full year (FY20), the GDP growth was estimated at 4.2%. The two key drivers of employment: manufacturing and construction reported a nill(0% growth) and construction sector reported a growth of 1.3% compared with a growth of 5.7% and 6.1% respectively lin the previous year. The only silver lining is agriculture which grew at 4% in 2019-20 as compared to 2.4% in 2018-19. On the spending side, Gross Fixed Capital Formation(GFCF) contracted by 0.4% as against a growth of 14.5% in 2018-19.

Fragile Fiscal Situation:

·         Deviation from the fiscal deficit target: Government of India raised the target from 3.3% to 3.8%.

·         The actual deficit came in at 4.6% as per the provisional actuals.

·         The government’s net tax revenue fell by Rs.1.5 lakh crore as compared to the revised estimates.

·         As compared to the previous year, the Gross Tax Revenue fell by 3.4% in 2019-20.

Lock down Strategy:

• India with its limited health care infrastructure and dense population chose to shut down activities.
• With lockdown there was a complete collapse of demand except for food and essential like medicines.
• Manufacturing and Services sector were worse hit.

Taking insight from the PMI Manufacturing and PMI Services,

            IIP contracted by 17% in March. For the month of April, Government held back the industrial production data owing to the fact that a number of units reported nil production due to the nation-wide lockdown.

• Electricity consumption fell by 19% in the first month of lockdown.
• Maruti recored zero sales in April.
• Tourism, Hospitality adversely impacted.
• Merchandise exports contracted by 60%, imports by 58.9% in the month of April. In May, the pace of contraction in exports eased to 38%.
• Core sector industries contracted by 37% in April and 23% in May.
• Only silver lining is agriculture: Record rabi harvest and satisfactory pace of Kharif sowing.

Early signs of recovery

• PMI Manufacturing Index shot up to 47.2% in June 2020.
• GST collections stood at 90,917 crore in June 2020.
• June unemployment eased to 11% from 23.48% in May 2020. Rural unemployment witnessed a sharper decline.

Adverse impact on MSME

• Adversed impact on business due to Shortage of Labour supply.
• Share in outstanding bank credit has declined.
• Covid is considered as the fourth shock to this sector after Demonitization, GST, NBFC crisis.
• A large chunk of MSMEs (45% as per recent survey) still dependent on informal sources of credit.

Policy responses to COVID-19

• Pradhan Mantri Garib Kalyan package.
• Atma Nirbhar package.
• Interest rate cuts
• Unconventional liquidity enhancing measures.

Policy response: Liquidity enhancing measures.

• Long term repo operations.
• Targeted long term repo operation (TLRO)
• Targeted long term repo operations 2.0
• CRR reduction
• Enhanced borrowing thorught MSF window.

Latest Monetary Policy Committee meeting

• Policy rate (repo rate) was cut to 4% from 4.4%.
• Reverse repo rate was adjusted to 3.35%
• Refinance facility of Rs.15,000 crore for SIDBI for 3 months is rolled over for another 3 months.
• Liquidity facility for EXIM Bank to the turn of Rs.15,000 crore.
• Moratorium extended till 31^st August.

Government’s Economic Package

Pradhan Mantri Garib Kalyan Package: Rs.1.7 Lakh crore.

·         Distribution of free food grains.

·         Cash payments to women Jan Dhan Account holders.

·         Front-loading of payments to farmers under PM-Kisan.

·         Payments to poor senior citizens, poor windows and poor disabled.

·         Insurance scheme for health workers.

·         Increase in MNREGA wages.

·         Relief to construction workers through Building and Construction Workers Welfare Fund.

Atma Nirbhar Package roughly amounting to Rs.10 lakh crore

·         Announcements were made in five tranches with a mix of sovereign guarantees, liquidity support and long term structural reform measures.

·         This was a not primarily about fiscal spend of Rs.10 Lakh crore.

·         Actual fiscal outlay not more than Rs.2 Lakh crore (1-2% of GDP).

·         The measures announced on day one included Rs.3 Lakh crore of uncollateralized loans for MSMEs, Rs.20,000 crore subordinate debt for stressed MSMEs and Rs.50,000 crore equity infusion through MSME Fund of Funds.

·         A look at the fine print tells us that for subordinate debt for MSMEs, the government’s fiscal outlay is Rs.4000 crore (To be given to CGTMSE that will in turn provide partial credit guarantee support to farmers)

·         For the MSME Fund of Funds, the government will spend Rs.10,000 crore for setting up of the fund.

·         Out of the Rs.3.7 Lakh crore package for MSMEs the actual fiscal

Other measures announced under the first tranche

·         Other measures include revision in the definition of MSMEs and prohibition on global tenders up to Rs.200 crore.

·         A unit with up to Rs.1 crore investment and Rs.5 crore turnover will qualify as a micro unit, investment up to Rs.10 crore and turnover up to Rs.50 crore will qualify as a small unit, and investment up to Rs.50 crore will qualify as a small unit, and investment up to Rs.50 crore and turnover up to Rs.250 crore will qualify as a medium enterprise.

·         Liquidity support for NBFCs: liquidity scheme of Rs.30,000 crore and partial credit guarantee.

·         EPF support for 3 more months.

·         Liquidity support to Discoms

·         Cuts in TDS.

Measures announced in the second tranche

Farmers, migrant workers and street vendors

·         Food grain supply to migrants.

·         Interest subvention of 2% for Shishu loans.

·         Relief for street vendors through a credit facility of Rs.5000 crore.

·         Employment generation initiatives.

·         Measures for farmers: Rs.2 lakh crore of concessional credit and Rs.30,000 crore working capital funding through NABARD.

Measures announced in the third tranches

      (Focus was on agriculture)

·         Rs.1 Lakh crore agri-infrastructure fund.

·         Initiatives to strengthen fisheries value chain.

·         Initiative to address supply chain disruption: TOP to TOTAL, Rs.500 crore.

·         Control of animal disease, animal husbandry infrastructure, micro food enterprises, promotion of herbal cultivation.

·         A Central Law to reduce farmer’s dependence on APMCs: Farmers will not be bound to sell their produce in Mandis, can sell freely to FPOs, Co-operatives.

Measures announced in the fourth tranches

Focus was on long term structural reforms with greater private sector participation

·         Private sector participation in coal sector: Commercial mining.

·         Private sector participation in minerals sector.

·         Self-reliance in defence production.

·         Indigenization of imported spares;

·         FDI limit in the defence manufacturing under automatic route will be raise from 49% to 74%

·         Airport up gradation and modernization: Six airports through PPP.

·         Privatization of power discoms.

·         Private sector participation in social infrastructure through viability gap funding of Rs.8100 crore.

Measures announced in the fifth tranche

·         Additional Rs.40,000 crore through MGNREGA

·         Health reform initiatives.

·         IBC related measures.

Focus is on developing the rural economy

• Reverse migration is in full swing so emphasis is on developing the rural economy.
• Enhancement of financing for MGNREGA by Rs.40,000 crore.
• Host of initiative for development of agri and allied activities.
• Reform of agriculture produces marketing.
• To promote barrier free Produce Trade and Commerce (Promotion and Facilitation) Ordinance 2020
• This will pave the way for an ecosystem where farmers and traders will have freedom of choice of sale and purchase of agri produce. The age-old practice of selling in licensed mandis will give way for more flexibility is sale options for farmers.
• Impetus to contract farming: The farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Ordinance, 2020 to empower farmers to engage with processors, large retailers and exporters.
• Amendments to Essential Commodities Act.
• Rs. 8 Lakh crore provided by RBI through liquidity measures and refinance.
• The actual fiscal outlay of the government’s package is not more than 1-2% of GDP.
• That seems a prudent strategy: At a time when revenues are collapsing.
• Government has enhanced its borrowings by Rs.4 Lakh crore.
• That is not sufficient to finance a big bang fiscal package.
• States have been given greater leeway to borrow upto 5% of GDP.
• Situation is uncertain and still evolving; government cannot afford to exhaust its ammunition in the first two months of the fiscal year.
• Emphasis has been on improving liquidity to enable business to kick start activity.
• Interest rate cuts by RBI may not result in greater lending by banks.
• Banks have become risk averse.
• Demand is also low.
• Banks are parking funds with RBI under reverse repo transactions even after RBI has cut reverse repo rate.
• While banks have reduced rates, credit spread for low rated borrowers remains high.
• Periodic review of the measures announced is necessary: are genuine MSMEs getting loan?

#Dr.Badri Gopal Krishnan (Affiliated faculty Member, University of Washington-Seatle Consultant, The World Bank Group, Co-Founder and Partner, Infinite Sun Modeling LLC)

#Prof.Ravikant Swami (Director, Delhi Metropolitan Education (GGSIPU))