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Even from the limited details that Prime Minister Narendra Modi explained in his speech on Tuesday night about the Rs 20 trillion stimulus package, it was clear that this main figure would be achieved by adding apples and oranges. The details now provided by Finance Minister Nirmala Sitharaman on Wednesday make it explicit.
Not all Rs 20 trillion constitutes additional tax expenditure. They include additional expenses, loans, loan guarantees and other forms of government and Reserve Bank of India (RBI) commitments.
This is just as good. The medium and long-term impact of adding 10 percentage points to the fiscal deficit would not have been nice. The government would have had to print massive sums of money raising large amounts of outstanding cash, perhaps as much as 25-30%.
No one knows how much impact the package will have on the fiscal deficit. There are too many unknowns. We do not yet know the extent of Covid-19’s impact on tax revenue, as well as the readjustment of originally budgeted expenditures. Surely, many of the budgeted spending allocations would also be spent as a result of Covid-19.
More than the main figure of Rs 20 trillion, what matters is the quality of the package. Covid-19 has not been an ordinary shock to the economy. It hit both demand and supply severely, and simultaneously. Therefore, neutralizing one shock without the other cannot go very far. Added to this complication is the fact that supply shocks have impacted different sectors and different companies differently. That makes the legislator’s task complicated, to say the least.
Taking these factors into account, the first installment of the package of measures announced by the finance minister on Wednesday is an important step in keeping the economy afloat as the fight against Covid-19 continues, especially in the states and districts that make up the main centers. of economic activity.
I use the term “stay afloat” instead of “revive” because right now that is the main challenge facing the economy. True revival can only occur once the hands reach the machines. As long as health problems keep workers away from their jobs, no significant revival can occur.
Building on the original 1.7 trillion rupee package from the government that was announced in March, and a series of RBI actions, the latest package announced on Wednesday, which is Part I of the overall package, focuses on availability credit for companies, especially in the category of micro, small and medium-sized enterprises (MSMEs), so that they remain afloat until the economy enters into a genuine revival mode.
For MSMEs, the package allocates Rs 3 trillion for unsecured loans. The loans have a four-year tenure with no payments due for one year. It also allocates Rs 20,000 crore for subordinated debt intended to help currently stressed MSMEs.
There is a new infusion of Rs 50,000 crore in capital funds for MSMEs. For now, these are substantial sums. The challenge will be your outlay.
Another important component of the package focuses on non-bank financial companies (NBFC), housing finance companies (HFC), and microfinance institutions (MFIs).
The government proposes to launch a special liquidity plan of Rs 30 billion for these companies. The funds will be used to purchase debt issued by NBC, HFC and MFI. The measure will complement RBI’s actions to improve liquidity.
In an important step, the government intends to grant a partial loan credit guarantee of Rs 45 billion to NBFCs and HFCs, which in turn offer credit to MSMEs.
Under the scheme, GoI will assume the first 20% of the loss incurred on such loans. The scheme should help convert some of the existing funds into real liquidity.
Power distribution companies have been a permanent source of trouble for the government. Her problems have worsened during the crisis due to a sharp decline in income.
The package infuses Rs 90,000 crore into liquidity in these companies. These funds come in the form of loans to be guaranteed by state governments.
In addition to these measures designed to mitigate shocks on the supply side, Sitharaman has also included some modest measures on the demand side. For example, Source Tax Deduction Rates (TDS) and Source Tax Collection (TCS) will decrease by 25% for the remainder of the current fiscal year.
The due date for income tax collection for fiscal year 2020 has been extended to November 30, 2020.
The package also contains some modest policy changes. For example, GoI proposes to change the definitions of MSMEs. The review will allow larger companies in each category. This can encourage companies in each category to grow without fear of losing the benefits provided in their category.
The government also decided to exclude foreign companies from the tender for government contracts of Rs 200 or less. This is also intended to give more space to MSMEs.
The announcements are Part I of the general package and focus mainly on MSMEs mainly because this is where employment is concentrated. It remains to be seen what the next installment brings.
The larger corporations, which are the source of much larger output, although not jobs, also require provisional support. What the government does for them also remains for another day.
The writer is a professor of economics, Columbia University, USA. USA
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