Lockdown, Stimulus and India's GDP 2020-21

Lockdown, Stimulus and Growth

Is India Staring at a Large GDP Contraction in 2020-21?

SUBHASH CHANDRA GARG

Economy, Finance and Fiscal Policy Strategist; Former Finance and Economic Affairs Secretary, Government of India

SUMMARY

India was not in the pink of economic health in 2019-20. First Estimates of 2019-20 announced on 29^th May confirmed this. India grew barely by 4% for the year which happens to the lowest growth rate in last 11 years.

In one of the most impulsive decisions taken, India was placed under a 21- day lockdown virtually without any notice or warning on 24^th March, 2020. 135 crore Indians got locked-up in their homes or wherever they were stranded on the evening of 24^th March. Millions of businesses, producing goods and services, barring the ‘essential goods’ were locked-down. The lockdown rendered over 10 crore workers jobless overnight; many of them started walking hundreds of kilometres to the ‘safety’ of their rural homes. India’s lockdown strategy was faulty. The lockdown was imposed under a naive belief that India would be able to eliminate Covid-19 from the face of India in three weeks’ time. India decided to use the brahmastra- total economic and human lockdown- on the entire country when only a tiny part was infected.

Lockdown 1 and 2 (entire month of April) turned out to be extremely severe, though agriculture and government expenditure, which constitute about 25% of GVA, remained almost unaffected. As 70% of the remaining economy remained shuttered, about 50% of monthly GDP output was lost in April. Lockdown 3 (first half of May) opened up India a little bit. Lockdown 4 (second half of May) allowed many productive activities to commence. Yet, India would lose about 40% of monthly output in May as well.

Following Prime Minister’s announcement of a Rs. 20 lakh crore Stimulus Package on 12^th May, Finance Minister revealed the package in five instalments over next five days (13-17^th May). This package was costed at Rs. 20.97 lakh crores or 21 lakh crores on the final day of announcements. It included March 26 package and also various liquidity measures taken by the RBI. It also included some releases made from existing budget for supporting health infrastructure and for meeting disaster relief arrangements.

The 21-lakh crore package is a mish-mash of five kinds of interventions- liquidity measures by the RBI, liquidity measures by the Government, fiscal support measures by the Government, credit support to businesses and other measures in the nature of intent of future investments and expenditures to be incurred by others.

While quite late compared to other Central Banks, RBI was off the block in the last week of March to announce a slew of liquidity measures which, as claimed by the Finance Minister in her presentations, added up to Rs. 8.1 lakh crores. RBI liquidity measures were aimed at encouraging, even forcing, the banks to lend and to buy corporate bonds. As these measures did not take into account massive credit risk averseness of banking system and absolute inability of the businesses to take credit in the lockdown, the liquidity bazooka proved a damp squib. The banks availed very little of the liquidity measures offered by RBI. On the contrary, they increased their Reverse Repo deposits with RBI to unprecedented levels of Rs. 7.5 lakh crores (higher than post demonetisation liquidity).

The Government followed up with its own set of liquidity measures totalling to Rs. 4.45 lakh crores. These were based on guarantee support from the Government and additional liquidity by the Central Financial Institutions like NABARD. All these measures are riddled with many ifs and buts and rely on unfounded hopes of an unprecedented performance by the financial institutions. MSMEs credit flow, following normal growth and suasion of government might lead to credit flows of about Rs. 1.5 lakh crore. Rest of the liquidity measures may remain on paper.

A fiscal stimulus measure should usually result into expansion of government expenditure. A close examination of 21-lakh crores economic stimulus package suggests that fiscal measures amount to only Rs. 1.45 lakh crores (or about .7% of GDP). Lot of hopes were raised when the Prime Minister announced Rs. 20 lakh crores package. However, in the end, the government chose not to rock the fiscal boat.

There were three credit stimulus measures of Rs. 3.25 lakh crores in the Aatm Nirbhar package- Rs. 3 lakh crore credit facility for standard MSMEs, a Rs. 20 thousand crore credit facility for non-performing MSMEs and a Rs. 5 thousand crore credit facility for street vendors. Total outstanding credit to Micro and Small Enterprises is about Rs. 15 lakh crores. A Million-dollar question is whether the banks would really lend to the MSEs. Credit policy is the responsibility of RBI. It is strange that credit package came from the Government. The MSME credit package relies on government guarantees. It is unlikely that the private sector banks would fall for this. It is only the PSBs which might deliver something under this package. The directed credit with the bait of guarantee might drive the last nail in the coffin of PSBs.

The remaining package totalling Rs. 3.8 lakh crores comprising three types of interventions- intent to invest in agriculture infrastructure and MSMEs, some measures already part of the budget and the measures which parties other than the Government of India were expected to carryout. Five measures totalling Rs. 1.295 lakh crores constituted government’s intent to make investment in agriculture and allied sector infrastructure, including a Rs. 1 lakh crore Agri Infrastructure Fund to build farm-gate infrastructure. For MSMEs, the Government announced a Rs. 50 thousand crore Fund of Funds. There are two schemes- Matsya Sampada Yojana and Viability Gap Funding Scheme for which their lifetime outlays were announced as part of the stimulus package.

The fiscal stimulus measures announced would at best cost Government Rs. 1.5 lakh crore. The Government is attempting to save more amount than this by controlling expenditures. The government may end up the year 2020-21 without expanding expenditures at all. A Rs. 21 lakh crores stimulus delivered without costing anything to the Government!

GDP matters as all the three factors of production- workers, capital and government- receive their income- wages, profits and taxes- from the value added produced in businesses. The task of assessing likely 2020-21 GDP performance is indeed not only a difficult exercise but there are also lot of unknowns.

The Gross Value Added (GVA) from the supply side falls broadly in three groups. First group of agriculture and allied sector makes up about 15% of India’s GVA and government services, which also amounts to about 15% of GVA, have largely remained unaffected and are likely to see no contraction in 2020-21. Industrial goods, mining goods, construction and utilities together form about 40% of GVA. Barring a few essential goods and some continuous processing industries and utilities almost every business in this group was down and out in April. For the year as a whole, this group contributing about 40% of India’s GDP is expected to suffer about 15-20% loss of GVA. Remaining services- trade and commerce, transportation, financial, and hospitality etc.- makes up another about 40% of India’s GVA. As trade and commerce and financial services make up about 2/3^rd of the services in this group and these are likely to return normal performance for the year and transportation and hospitality services would be severely disrupted, it will be fair to estimate that about 8-10% of the GVA in this group would get lost in the year 2020-21. Putting the sum of parts together, supply side dynamics seem to suggest that India’s GDP will contract by about 10-12% for the financial year as a whole. 

There are three primary contributors to the GDP from demand/expenditure side- private consumption, government consumption and investment which contribute approximately 58%, 13% and 29% of GDP. It looks likely that capital formation growth would decline by 15-20% in the current year. Assuming that the Government would be able to keep its expenditure at BE levels, the government expenditure which is about 13-14% of GDP should grow by about 10%.  Private consumption has two major parts- essential consumption and discretionary consumption. Essential consumption- food, medical, gas, water and electricity etc.- makes up about 70% of the total consumption or about 40% of GDP. Discretionary expenditure- travel, entertainment, restaurants etc.- makes up for about 20% of GDP. The essential consumption may stay flat during the year. Discretionary expenditure which suffered substantial setback in last two months and may not achieve normal level during the entire year may make discretionary expenditure contract by about 25-30% for the year as a whole. Putting all these together, India is likely to see about 8-12% contraction from the demand side as well.

There are three real factors of production- labour, capital and government. They share the GDP income. They benefit when GDP grows. Their incomes enlarge, may be in varying proportions, when GDP grows. They also suffer when GDP contracts. About 65% of GDP income accrues to workers- the largest factor of production and the largest factor of consumption. Roughly about 20% of India’s GDP services the capital. Remaining 15% is the share of governments. The state of play suggests that the government would bear about 25% of the loss of GDP income of Rs. 20 lakh crores i.e. a total loss of about Rs. 5 lakh crores. The capital may get away with a loss of not more than 10% of total income loss i.e. about Rs. 1 lakh crore. The workers would bear the rest of it- a whopping loss of about Rs. 14-15 lakh crores in the year 2020-21.

It is certain that India’s GDP will contract after 40 years in 2020-21. It also appears fairly certain that this would be a very large contraction- of about 10% of GDP or loss of about Rs. 20 lakh crores of income. The nominal fiscal package of Rs. 21 lakh crores is actually of only 1.4-1.5 lakh crores or about .7% of GDP. While the strategy of Government may succeed in not allowing fiscal deficit to expand on account of expenditure stimulus, but the big hole on revenue side and off-budget expenditures will make central government fiscal expenditure go beyond 7% in 2020-21. Every factor of production will suffer- the workers most. 2020-21 will go down in the history of India as the year when India got way-laid from its story of 3 decadal outstanding growth.

SUBHASH CHANDRA GARG

NEW DELHI 02/06/2020

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Lockdown, Stimulus and Growth

Is India Staring at a Large GDP Contraction in 2020-21?

SUBHASH CHANDRA GARG

Economy, Finance and Fiscal Policy Strategist; Former Finance and Economic Affairs Secretary, Government of India

India was not in the pink of economic health in 2019-20. First Estimates of 2019-20 announced on 29^th May confirmed this. India grew barely by 4% for the year which happens to the lowest growth rate in last 11 years.

In one of the most impulsive decisions taken, India was placed under a 21- day lockdown virtually without any notice or warning on 24^th March, 2020. 135 crore Indians were locked-up in their homes and wherever they were stranded on the evening of 24^th March. Millions of businesses, producing goods and services, barring the ‘essential goods’ were locked-down. The lockdown rendered over 10 crore workers jobless overnight; many of them started walking hundreds of kilometres to the ‘safety’ of their rural homes.

The psychology of lockdown continued for two months of April and May. Presently we are in Unlock- India phase but lockdown has sent so many shock-waves across the economic system that it is unlikely that normalcy would return even by September end.

In this blog, I assess the economic impact of lockdown, who is bearing the brunt of losses it has caused, adequacy and effectiveness of the ‘stimulus’ package and what might be in store for Indian economy, businesses, workers, households and governments.

GDP Matters and GDP Growth Matters

GDP approximates very closely total income, total expenditure and total value of all the goods and services produced in the country. Income, expenditure and value added are three dimensions of a single three-dimensional coin.

GDP matters as all the three factors of production- workers, capital and government- receive their income- wages, profits and taxes- from the value added produced in businesses.

GDP matters as all the income received, along with credit, pays for all the consumption and investment in the economy. GDP growth matters. If GDP growth slows, India stagnates. Incomes stagnate, investments stagnate and consumption does not grow. Welfare is compromised as taxes do not grow when GDP does not grow.

Economic Foundations Became Shaky in 2019-20

India’s GDP, at constant prices, was Rs. 140 lakh crores in 2018-19. This was expected to grow by about 7% in 2019-20. In current prices, India’s GDP was expected to cross 210 lakh crores in 2019-20. The GDP, however, grew by only 4% and, at current prices, is barely above Rs. 200 lakh crores.

Economic slowdown was waiting to happen in India for some-time now.

Great Global Expansion (GGE) 2003-2008, fuelled by Chinese extraordinary growth, flood of global liquidity and US housing investment boom, had petered out in the Global Financial Crisis (GFC). Private enterprise, unleased in India by the reforms of 1990s, fed on the GGE and led to massive expansion of investments. While the investment expansion generated excellent growth in India during GGE period, the excessive stimulus post GFC fuelled growth in 2010-2012.     

Lower crude oil prices, exceedingly well-designed programmes to deliver housing, fuel, electricity, toilets and other lasting benefits to the poor and larger public expenditure on capital investment reversed the declining growth of 2012-2014 and India clocked quite satisfactory growth during 2014-2019. India also undertook a slew of reforms- Insolvency and Bankruptcy code to fast resolve bankruptcy in real sector, Real Estate Regulatory Agency law for bringing some order in real estate sector and Goods and Service Tax reforms to build a one nation one tax regime and promote borderless movement of goods in the country. These reforms also contributed.

Hastily designed and poorly implemented monetisation, inability to implement the real GST reforms, expanding non-performing assets of the banking system, rising crude oil prices and sacrificing investment to provide massive capital to floundering public sector banks, airlines and telecom companies had queered the pitch in 2017-2019. Growth had started coming off.

Government took the foot off the growth paddle in 2019-20. Economic agenda receded in the background. Excesses of public expenditure in capitalising loss-making public enterprises and shifting the expenditures off-budget started to bite. Lack of reforms in infrastructure sectors across the board- roads, railways, telecom, power, coal, metals- discouraged private investment. Capital investment collapsed. Gross Fixed Capital Formation (GFCF), the indicator of investment in the economy, declined by over 3% in 2019-20. GFCF growth went into negative territory for the first time after 2002-03.

India Went for a Faulty Lockdown Strategy

From China, Coronavirus- Covid-19- had started spreading all over the world by the end of February. Large number of new infections from Iran, Italy and the US were reported in March. The WHO declared Covid-19 a global pandemic on March 13, 2020. Covid-19 had started spreading asymptomatically as well in March.

India, however, had much lower incidence of Covid-19 infection in March. By 23^rd March, the day before the lockdown was declared, India had a total of barely 500 active cases and 10 deaths. Even if one assumes that undetected incidence was 5-10 times, more than 99.999% of Indian did not have Covid-19 infection on that day. Likewise, barring the cities which had received foreigners and foreign-returned Indians, 100% of rural areas and 99% of Indian cities also did not have any incidence of Covid-19 infection.

China imposed a total lockdown on 23^rd January when the Covid-19 cases had started emerging in Wuhan province. The lockdown was implemented mostly in this province. None could go in Wuhan. None could come out of Wuhan. It perfectly separated the infected and uninfected. Wuhan had over 81000 cases on March 24^th. Covide-19 infections had not only peaked by that time but it almost stayed at that level. Lockdown worked in China. Total cases did not reach 83000. After 76 days, lockdown was completing lifted in Wuhan. There are less than 100 active cases in China today. Chinese lockdown has been highly successful. China, where Covid-19 started and which for many weeks was the country with largest Covid-19 infected cases, has gone down to be 17^th most cases country on 31^st May. Chinese lockdown model was- impose strictest access and contact control in the local area where the incidence of Covid-19 was in evidence and track and trace everyone likely to be infected. This strategy seems to have worked very well.

Iran and Italy went on a very different trajectory. Deaths started getting reported in Iran and Italy in February. Both countries ignored the Covid-19 hotspots. Lot of infected people moved from the hotspots to many places in the country and abroad. Covid-19 quickly spread to all parts of the country. Both countries imposed severe lockdown much later. They had to impose all over the country as the infection had spread far and wide. Iran had witnessed more than 1800 deaths by 24^th March. Italy had more than 6,000 death by March 24, 2020.

Some other approaches were tried by different countries. South Korea and Japan did not lockdown. They decided to trace and track the infected and isolate these. Some countries like UK and Sweden adopted strategy of building herd immunity taking the risk of very large spread of Covid-19.

India had the benefit of seeing effectiveness and impact of all these strategies when the decision was made on 24^th March, 2020. Unfortunately, our decision more emotional than informed. We locked down entire country instead of the cities which were impacted. 99% of the country which had no incidence got locked down for no reason. The lockdown also meant that a lot of people and workers who lived in very crowded conditions close to the people who were infected in our port cities were trapped there. They were not allowed to move out. No transportation was permitted.

The lockdown imposed in India could have delayed the spike in spread of infection, but only a bit. The fact that India is now witnessing over 8000 cases a day and the virus has spread all over the country confirms that the lockdown only delayed a little bit. India is now in top 8 nations with the highest overall infections, in top 3-4 countries with highest daily infections and is likely to be soon highest daily infection reporting country.

India’s lockdown strategy was faulty and reflected more a panic than any careful consideration of facts, international experience and its economic and humanitarian consequences.

The lockdown was imposed under a naive belief that India would be able to eliminate Covid-19 from the face of India in three weeks’ time. There were two assumptions on which Indian lockdown decision was based. First, there were only 500 odd Covid-19 positive persons and if they were placed in hospitals and everyone else was confined to their homes, the infected and uninfected would not come into contact with each other and the chain of infection would break. Second, the asymptomatic persons would display the symptoms in maximum three weeks and such persons would get identified in this three weeks’ period.

In the heat of moment, India decided to use the brahmastra- total economic and human lockdown- on the entire country when only a tiny part was infected. No other country in the world went for such a sledgehammer approach. One lockdown followed another lockdown. We have had four versions of lockdown so far. While some opening up commenced from lockdown 3, India begins formal unlocking only from June 1.

The Lockdown Decision Dealt a Deadly Blow to Economy

At barely a four hours’ notice, that too at 8 pm in the evening, India’s economy was completely stopped in its track. All factories, mines, construction sites, markets, hotels, restaurants, transport, practically every place where good and services were produced was shuttered. All wheels- airlines, railway, buses, taxies, cars, auto-rickshaw, bicycle- were halted.  All consumers and workers were locked in their homes or wherever anyone was in that fateful midnight of March 24.

Only covid-19 related health services, essential supplies like food and medicines, some government services, some financial services and some continuous process industries were allowed to operate. When it was realised that rabi crops were ready to harvest, crops were exempted from lockdown a few days later.

The economy shuttered with a thud from 25^th March. 70% of the economy came down crashing. Digital services companies adapted to new operating conditions and transitioned work to be transacted at home. But very little was produced, sold or consumed during the first lockdown of 21 days.

There were severe economic and humanitarian consequences of the lockdown decision.

As the lockdown decision covered the last week of financial year 2019-20, the GDP for Q4/2019-20 shrank from expected 5% to 3.1% only account of one week’s output loss.

Lockdown 1 and 2 (entire month of April) turned out to be extremely severe, though agriculture and government expenditure, which constitute about 25% of GVA, remained almost unaffected. As 70% of the remaining economy remained shuttered, about 50% of monthly GDP output was lost in April. Lockdown 3 (first half of May) opened up India a little bit. Lockdown 4 (second half of May) allowed many productive activities to commence. Yet, India would lose about 40% of monthly output in May as well.

Humanitarian consequences were more heart-rending. Signs of ensuing humanitarian crisis became visible in the first week of lockdown itself when thousands of migrants came out to get on to buses, when it was announced that these are being arranged to take them homes. They were stopped and pushed back to their shelters with total clamp-down on bus transportation reiterated ferociously. An additional chief secretary who was trying to arrange buses was suspended. As all means of transportation had been stopped, thousands of people started walking on roads for hundreds of miles. Many migrant workers smuggled themselves to their home states hidden into essential goods trucks. A girl cycled her mother for 1200 kilometres. Many collapsed on the way. Many people felt that it reminded horrific scenes of partition time transfer of populations.

Finally, after witnessing this misery on roads and cities for the entire month of April, the government relented and started making arrangements for transporting migrants to their home states from the beginning of May. It is estimated that about 50 lakh migrants were transported by Railways and about 3 times by buses and other means. 2 crores labour force of India got displaced from their work-places to the homes which they had left behind, in most cases, awaiting a hardly a liveable existence.

The lockdown decision made over 80% of Indian non-agriculture businesses exceeding 6 crores go out of business, more than 10 crore workers become jobless and over 20 lakh crores of GDP lost.

21 Lakh Crore Stimulus Package  

Finance Minister announced an economic package, named Pradhan Mantri Garib Kalyan Yojana (there is a marked preference to use this schematic name; earlier post demonetisation also an amnesty scheme named Pradhan Mantri Garib Kalyan Yojana was taken up to encourage holders of demonetised notes to deposit such currencies in bank accounts), on 26^th March. This package was a mix of Government of India budgetary expenditure, additional expenditure, expenditures to be incurred by states from different funds like construction workers fund etc. and certain tax deferments. There were 12 interventions on which amounts proposed to be spent totalled to Rs. 1.70 lakh crores. However, intervention wise cost was not announced. It has not been provided thus far. A careful study of the Garib Kalyan package of 1.70 lakh crore suggested that additional fiscal expenditure implications, at best, were only Rs. 75,000 crores for the Centre.

Following Prime Minister’s announcement of a Rs. 20 lakh crore Stimulus Package on 12^th May, Finance Minister revealed the package in five installments over next five days (13-17^th May). This package was costed at Rs. 20.97 lakh crores or 21 lakh crores on the final day of announcements. It included March 26 package and also various liquidity measures taken by the RBI. It also included releases made from existing budget for supporting health infrastructure and for meeting disaster relief arrangements.

This 21-lakh crore package is not a pure stimulus package. Normally, an economic stimulus package manifests in three forms- grant/equity support to businesses and demand support for consumers from the government, credit support to businesses and households from financial system and financial assets purchased.

The 21-lakh crore package is a mish-mash of five kinds of interventions. These are- liquidity measures by the RBI, liquidity measures by the Government, fiscal support measures by the Government, credit support to businesses and other miscellaneous measures broadly of three types- existing budgetary provisions included as fresh measures, intent of future investments over 3-10 years and expenditures to be incurred by others.

RBI Liquidity Support as Stimulus?

While quite late compared to other Central Banks, RBI was quickly off the block in last week of March to announce a slew of liquidity measures, which the Finance Minister claimed in her presentations in May added up to Rs. 8.1 lakh crores.

The RBI measures included reduction in Cash Reserve Ratio by 1% (Rs. 1.37 lakh crore), a number of Targeted Long-Term Repo Operations to provide liquidity to banks to lend to or buy securities from targeted borrowers/issuers/holders, a slew of refinance measures for institutions like NABARD and SIDBI, enhanced liquidity facilities like Marginal Standing Facility and the like. RBI also announced a number of regulatory measures which essentially have by now amounted to 6 months of moratorium on servicing of most of the loans and change in prudential income and default recognition norms.

The RBI liquidity measures were aimed at encouraging, even forcing, the banks to lend and buy corporate bonds. RBI enlarged the spread between reverse repo and repo rates and reduced reverse repo rates to very low levels of 3.75% first and 3.35% later to ‘nudge’ the banks not to deposit their surplus liquidity in reverse repo window but to extend credit. As these measures did not take into account massive credit risk averseness of banking system and absolute inability of the businesses to take credit in the lockdown, the liquidity measures bazooka proved a damp squib. The banks availed very little of the liquidity measures offered by RBI. On the contrary, they increased their deposits with RBI to unprecedented levels (even higher than post demonetisation). Reverse repo deposits exceeded Rs. 7.5 lakh crore as month of May drew to a close.

RBI refused to entertain any proposals for direct purchase of financial assets from the non-banks and businesses. It purchased only Government of India securities from banks primarily under open and not-so-open market operations. In terms of survival, revival and stimulus support to the Indian economy post Covid-19 and lockdown, RBI measures amounted to a big zero.

Government of India Liquidity Measures

Liquidity is in fashion. Many decision makers probably equate liquidity with credit. Liquidity is the ability to extend credit. It is not credit. Unless liquidity with the financial system converts into credit for businesses and households it remains liquidity. Liquidity is more appropriate for dealing with payment freeze situation. Liquidity alone cannot assure flow of credit.

The Government followed up with its own set of liquidity measures in the course of the five-part 21-lakh crores stimulus package. Liquidity measures announced by the Government totals Rs. 4.45 lakh crores. These were based on guarantee support from the Government and additional liquidity by the Central Financial Institutions like NABARD.

These measures included a Rs. 2 lakh crores additional credit flow to farmers presently out of Kisan Credit Card system and Rs. 90 thousand credit by Power Finance Corporation and Rural Electricity Corporation to bankrupt State Electricity Distribution Companies to clear outstanding payments of generators and other input suppliers. 

GOI announced two specific liquidity measures to support flow of credit to Non-Bank Finance Companies (NBFCs), including Housing Finance Companies (HFCs) and Micro-Finance Institutions (MFIs). The Rs. 45 thousand crore Partial Credit Guarantee Scheme 2.0 is only a modified version of Partial Credit Guarantee Scheme announced and under implementation since 2019. The modified scheme would cover banks’ subscription in primary issuance of bonds and commercial papers of NBFCs for 20% partial risk guarantee. The other facility, a Rs. 30 thousand crore Special Liquidity Scheme for NBFCs, HFCs and MFIs to be implemented through a Special Purpose Vehicle (SPV), will buy their bonds and papers in both secondary and primary markets.

The Government, by reducing rates of tax deduction at source and postponing filing of returns and depositing of tax deducted etc., claimed that liquidity of Rs. 50000 crores would be injected in businesses. The last of liquidity measures announced by Government was an Emergency Working Capital Support from NABARD of Rs. 30 thousand crores.

All these measures are riddled with many ifs and buts and rely on unfounded hopes of a superlative performance by the financial institutions. Rs. 2 lakh crore credit through KCC targets the farmers who are registered under PM KISAN Scheme but do not borrow through KCCs. Most likely these farmers are either absentee landholders who do not cultivate the lands or are too marginal to avail credit. It is unlikely that there would be any traction on this front. Rs. 90 thousand crore PFC/REC facility is in effect replacement of generators’ credit by their credit. Rs. 45 thousand crore Partial Credit Guarantee is part of a non-starter Guarantee Scheme. Rs. 30 thousand liquidity support, which was later announced to be of only 3 months, though a SPV which issues bonds subscribed by only RBI is either too complicated to see the light of the day or would make very little difference as NBFCs are not keen to get liquidity support for only 3 months. NABARD Emergency Working Capital Facility is not required for the present.

The liquidity measures of Rs. 4.45 lakh crores announced by the Government are unlikely to result into any credit flows and most likely to remain on paper.

Fiscal Stimulus

Critical characteristic of a fiscal stimulus measure is that such a measure should result into expansion of government expenditure or reduction of government revenue. Fiscal stimulus support businesses to undertake survival and revival measures to continue their businesses or supports households in raising or regaining lost consumption demand.

A close examination of 21-lakh crores economic stimulus package suggests that various measures amounting to only Rs. 1.45 lakh crores (or about .7% of GDP) satisfy the conditions of being termed as fiscal stimulus package. There are numerous small measures which make up the long list of fiscal stimulus measures. Of this, Rs. 70 thousand crores out of Rs. 1.70 lakh crore package announced on 26^th March qualify for fiscal stimulus measures. Remaining Rs. 70 thousand crores measures were announced by the Finance Minister.

Of the 26^th March measures (out of Rs. 1.7 lakh crores package), additional free foodgrains (5 kg wheat/rice and 1 kg dal) to 80 crore ration card holders for 3 months, are likely to cost the Government approximately Rs. 30 thousand crores. Rs. 500 per month for three months to 20 women crore Jan Dhan account holders will cost another Rs. 30 thousand crores. Three free cylinders to 8 crore Ujjavala scheme LPG connection holders would cost about Rs. 10 thousand crores. Other fiscal measures (Rs. 1000 to 3 crore pension holders and payment of PF contribution) would not cost more than Rs. 5 thousand crores. All these add up to a maximum of Rs. 75 thousand crores.

The largest component of fiscal stimulus measures announced by the Finance Minister is Rs. 40 thousand crore additional provision for Mahatma Gandhi National Rural Employment Guarantee Act (MG-NREGA) programme. This provision is over and above Rs. 61.5 thousand crore provision in the Budget 2020-21.

Next biggest fiscal stimulus measure is the one-time subsidy component of the Credit Link Subsidy Scheme (CLSS) which has been revived (the scheme was closed in 2019-20) and is expected to generate investment of Rs. 70 thousand crores during 202-21 as mentioned by the Finance Minister in her presentations. At most 20% of the investment in CLSS affordable housing schemes gets paid in the form of government subsidy. Assuming that the entire Rs. 70 thousand crore of affordable housing work is completed in 2020-21 (a highly unlikely situation), Rs. 14 thousand crores of fiscal expenditure would be incurred by the Government.

Rest of the measures are too small in size. Rs. 6750 crore of reduced Employees Provident Fund subscription (not really a government expenditure), Rs. 2800 crore of additional subscription by government for EPF contribution, Rs. 3500 crores of free foodgrains to migrants, Rs. 1500 crores of interest subvention of Shishu loans of MUDRA scheme and Rs. 500 crores of additional outlay for expanded TOP (Tomato, Onion and Potato) scheme, officially named Operations Greens) make up the rest of fiscal outlay for the schemes announced by the Finance Minister in her five-part Aatm Nirbhar Fiscal Stimulus Package.

Considering the extent of shock experienced by businesses and workers, the real Government of India fiscal package is stingiest. Only .7% of the fiscal support when at least Rs. 20 lakh crores of incomes of businesses and households has been lost.

More than 1/3^rd of package (Rs. 40 thousand crores of MGNREGA and Rs. 14 thousand crores of CLSS outlay) is also not going to delivered in six months period until September when such support was most needed. These additional provisions would come in play only when existing MGNREGA provision is exhausted and new sanctions under CLSS are issued.

Only cash support to 20 crores women with Jan-Dhan accounts, free foodgrains for three months and free LPG cylinders amount to true fiscal support measures. Free foodgrains to migrant workers, albeit announced very late when many migrants had left for their homes, also is a right fiscal support measure. All these measures cost only about Rs. 75-80 thousand crores or .4% of GDP. Rest of the measures are too small to make any meaningful difference. Real fiscal support in stimulus package of Rs. 21 lakh crores (10.5% of GDP) is actually .4% of GDP.

Lot of hopes were raised that India would undertake fiscal stimulus measures befitting the size of crisis when the Prime Minister announced Rs. 20 lakh crores package. However, in the end, the government chose not to rock the fiscal boat on expenditure side. On revenue side, it was in any case sinking.

Credit Stimulus

There were three credit stimulus measures in the Aatm Nirbhar package of the Finance Minister. These are- a Rs. 3 lakh crore credit facility for Micro, Small and Medium Enterprises (MSMEs), backed by Government guarantee, a Rs. 20 thousand crore credit facility for non-performing MSMEs and a Rs. 5 thousand crore credit facility for street vendors. In all, credit part of the stimulus package amounted to Rs. 3.25 lakh crores.

Rs. 3 lakh crore credit facility for MSMEs was named ‘Collateral-free Automatic Loans for Businesses, including MSMEs’. The facility envisaged 20% additional loans automatically to 45 lakh borrowers with existing loans outstanding between Rs. 25 crores and Rs. 100 crores. These loans are to be given for a period of 4 years with one year of moratorium on any servicing of loans. These loans would be backed by a no-questions asked government guarantee for 100% of the loan. These 45 lakh borrowers are supposed to be performing loans of the banking system and therefore risk perception of their defaulting has been assessed by the Government to be low.

For the riskier MSMEs, those which are in the non-performing category already, the Government announced a Rs. 20 thousand crores Subordinate Debt Facility. Under this Facility, banks are expected to provide loans to about 2 lakh non-performing/ in default MSMEs, which the Government would cover by 20% partial risk guarantee through its Credit Guarantee-Fund Trust for Micro and Small Enterprises (CGTMSE). The Government would provide grant support of Rs. 4000 crores to CGTMSE for this purpose.

The last of the credit scheme is a Special Credit Facility for Street Vendors. Under this facility, loans of Rs. 10000 each are expected to be provided to 50 lakh street vendors, which in all would result in flow of Rs. 5000 crores to them.

Credit is delivered through banking channels and the non-banks. There are about 7.5 crore MSMEs in India with over 90% of these being micro enterprises. Only about 50 lakhs of MSMEs receive credit in some form from banks and non-banks. Rest of the MSMEs have no access to formal credit. Total outstanding credit to Micro and Small Enterprises (MSEs), which RBI tracks as priority sector loans, amounts to about Rs. 15 lakh crores. Finance Minister targeted these MSEs when she announced 20% additional automatic credit scheme. The credit to MSEs has been slowing down for last three years. In last 2 years, it hardly grew by less than 5%. Expecting a 20% increase in credit to this group is indeed a large stimulus.

The proof of pudding is however in eating it. A Million-dollar question is whether the banks would really lend to the MSEs. Credit environment for MSEs has been deteriorating. Structuring of their loans without recognising the restructured loans as non-performing to save on provisioning has been going on for last two years. Covid-19 and lockdown caused shuttering of businesses has further compromised the quality of MSE credit. Moratorium on servicing of loans for six months this year is making information about their creditworthiness quite dicey. Amendment in IBC to virtually take MSEs out of the scope of resolution under IBC and suspension of IBC for a year will make banks more nervous.

Operability of the credit guarantee by the Government is also shrouded in lot of uncertainty. The government expect no real losses under this facility. While the facility when announced offered blanket guarantee assurance, later the bankers have been asked to do due diligence and take adequate measures to assess credit quality. As these existing loans are assumed to be performing loans, if on assessment or after factoring impact of lockdown on their businesses, the bankers come to the conclusion that the credit quality is impaired, they would not extend loans to such MSEs. There is also open question about what happens when an MSE to which automatic loan has been extended defaults. Who gets paid first? The banks would have 80% outstanding without coverage of government guarantee and 20% would only be covered by government guarantee. All these issues are likely to queer the pitch majorly and real flow of credit might only be a fraction of what is expected.

Rs. 20000 crore subordinate loan facility suffers from all the questions which the principal 3 lakh crore credit facility suffers from. In addition, these MSEs are already non-performing and in default. The Government is offering only 20% partial risk guarantee for loans extended by banks to such MSEs. It seems too much of vain hope that anything would actually flow. The banks are supposed to be lending institutions which use deposits for providing credits which not only comes back but also earns them a decent income to pay off interest to depositors and to generate profits for their capita. A banker would not be a banker if it lends to an enterprise known to be a defaulter at the time of extending credit.

Rs. 10000 credit to 50 lakh street vendors is a hare-brained scheme. Only expected numbers and amount of credit has been announced. Who would lend, what would be government’s support and whether street vendors, after being hit massively in the lockdown would take credit (unless they have no intention to repay) are the questions which need to be examined before this Scheme is operationalised? The Scheme does not seem to be going anywhere.

Credit policy is the responsibility of RBI. RBI is also regulator of banks. RBI is also supervisor of banks. It is strange that credit package came from the Government. RBI announced liquidity package but RBI made no announcement about credit policy and measures, except granting moratorium. After liberalisation, the Government had withdrawn completely from giving any directions about the provision of credit. The package announced by the Government relies on government guarantees as the instrument to push banks to lend to sub-prime credits. It is unlikely that the private sector banks would fall for this. It is only the PSBs which might deliver something under this package. PSBs suffered heavy losses when loans advanced by them to industry soured post Global Financial Crisis. The directed credit with the bait of guarantee might drive the last nail in the coffin of PSBs.

Other Stimulus Measures

There are three types of other stimulus measures, totalling Rs. 3.8 lakh crores, which contribute to make up 21 lakh crore Aatm Nirbhar economic package. First, there are numerous infrastructure and investment financing announcements which are more measures of intent than any stimulus. Second, there are announcements which are already part of the budget and do not constitute any fresh measure. Third, there are announcements for others institutions and government made by the Finance Minister.

Finance Minister announced five measures totalling to Rs. 1.295 lakh crores in Act III of her five-part package which constitute, at best, government’s intent to make investment in agriculture and allied sector infrastructure. The largest announcement was of a Rs. 1 lakh crore Agri Infrastructure Fund to build farm-gate infrastructure. As Animal Husbandry is also quite an important sector along with crop agriculture, a Rs. 15 thousand crore Animal Husbandry Infrastructure Fund was also announced along with. For promoting micro-food enterprises, a Rs. 10 thousand crore Food Micro Enterprises Fund was announced. Rs. 4000 crores for Promotion of Herbal Cultivation and Rs. 500 crores of Beekeeping Initiatives were also mentioned along with.

In addition, the Government announced a Rs. 50 thousand crore Fund of Funds for MSMEs to which the Government would contribute 20% contribution or Rs. 10 thousand crores. Along with Rs. 1.3 lakh crore agriculture and allied sector infrastructure fund investment, announcement of Rs. 50 thousand crore MSME Fund of Funds made the Intent to Invest Package a whopping Rs. 1.8 lakh crores.

There were some announcements which are already part of the budget 2020-21. In some cases, their annual outlays and in others, there lifetime outlays were mentioned as stimulus measures.

There are two schemes for which their lifetime outlays were announced as part of the stimulus package. Pradhan Mantri Matsya Sampada Yojana has been approved by the Cabinet on 20^th May with an outlay of Rs. 20000 crores as announced by the Finance Minister. This scheme is expected to be implemented over a five-year period until 2024-24 and the share of central government in the scheme is Rs. 9407 crores. Another scheme which had already been approved is 7-year Viability Gap Funding with total outlay of Rs. 8100 crores.

Release of Rs. 22800 crores for medical preparedness and for supporting relief and rehabilitation measures as Central Share of State Disaster Relief Funds were included in the announcements. These are part of the budget 2020-21. Supposed frontloading of Rs. 2000 first instalment under PM-KISAN announced as part of the 26^th March announcement was also provided in the Budget 2020-21.

Finally, the part of the stimulus which represented potential expenditures by third parties included a number of measures announced on 26^th March as part of the Pradhan Mantri Garib Kalyan Yojana and 80% part of the affordable housing expenditure. Releases from Building and Construction Workers Fund, District Mineral Funds etc. amounted to such type measures.

These Other Measures do not at all provide any stimulus support to the businesses and households. Some of these are too woolly as well. All SME funds registered by SEBI so far have total fund commitments of only Rs. 600 crores and the actual investment is not even Rs. 125 crores. An MSME Fund of Fund would invest in such SME funds only. If the GOI MSME Fund of Funds were to take 20% stake in the entire universe of MSE funds existing today (quite an unlikely thing in itself) it would amount to only Rs. 25 crores of investments. Forget about Rs. 50,000 crore Fund of Funds, if this achieves even Rs. 500 crores commitments in a year, this would be a great achievement.

Various infrastructure funds are actually same vine in the same bottle. Almost all of the funds exist today at 2-10% of the proposed funding levels. Actual funds utilised under these funds are not even 20% of the existing approved levels of funds. The levels envisaged in the announcements would perhaps not be achieved in 10 years.

Real Stimulus Size and Impact

Government of India has not followed the expansionary policy. The fiscal stimulus measures announced so far would at best cost Government Rs. 1.5 lakh crore. The Government is attempting to save 1-2 lakh crores by controlling expenditures by cancelling DA instalments and directing lot of Ministries and Departments to restrict expenditures in first quarter. If the policies in the remaining part of the year remain what these are presently, the government may end up the year 2020-21 without expanding expenditures at all.

The policy stance and the fiscal measures taken so far are not expansionary at all. The principal policy stance is contractionary in nature but the government might end with actual expenditures being very close to the budgeted expenditures.

There are institutional issues with the credit package as analysed above. Some credit does grow even normally. May be, about Rs. 1.5 crore of credit stimulus might get delivered out of about 13-lakh crore (Rs. 8 lakh crore RBI and Rs. 5 lakh crore Government) of liquidity and credit part of the Aatm Nirbhar Economic Stimulus package announced by the Government.

The stimulus package does not seem likely to make much difference to the trajectory of GDP loss which the lockdown decided for it.

Likely GDP Performance in 2020-21     

The most stringent lockdown imposed in India disrupted the supply side first. Almost all production of goods (other than agriculture and essential goods) and services (other than truncated health, financial and government services) came to a screeching halt on 25^th of March. All exports and imports also stopped.

Indian economy was slowing down in 2019-20. Capital formation growth had gone into negative territory in 2019-20. The supply shock disrupted incomes of workers and also businesses. The supply shock transmitted to demand side. All discretionary demand simply evaporated. All investment demand also disappeared.

Relaxation of lockdowns from the Lockdown 3 and substantial opening up of the economy from Lockdown 5/ Unlocking India 1 is slowing putting the economy back on track, though it is nowhere close to normal. While there are some new opportunities, a lot of existing businesses would need to be recast beyond recognition.

This makes the task of assessing likely 2020-21 GDP performance quite a difficult exercise. However, it is necessary to do so to make more informed and considered policy decisions in the remaining 10 months of this financial year to limit the damage to as little as possible.

Supply Side Assessment of GDP 2020-21

In the context of lockdown impact, the Gross Value Added (GVA) from the supply side, falls broadly in three groups.

Agriculture and allied sector which makes up about 15% of India’s GVA and government services, which also amounts to about 15% of GVA, has largely remained unaffected. Crops, fruits, milk and proteins production suffered only negligible impact even during the first two phases of the lockdown. There was some impact on vegetables, flowers production and distribution but that can be ignored in terms of overall performance. Likewise, while a large number of government servants could not attend their offices in the first two lockdown, their salaries and allowances were paid. Performance of agriculture GVA will more depend on monsoon and other natural factors than Covid-19 or lockdowns. We can take 30% of GVA quite unaffected. It may not grow much but agriculture GVA and government services GVA is unlikely to decline in 2020-21.

Industrial goods, mining goods, construction and utilities together form quite an integrated and mutually impacting part of India’s GVA/GDP. In our case, this group makes up for about 40% of GVA. Barring a few essential goods and some continuous processing industries and utilities, which together makes up for about 10% of GVA, almost every business in this group was practically completely down and out in April. It has remained more than 60% shuttered in May 2020. Businesses in this group are expected to reach 75% of production levels in June and attain more or less 90% of their normal levels of production by September end. Considering large demand shock, it is unlikely to do better than last year any time during the current year. For the year as a whole, this group contributing about 40% of India’s GDP is expected to suffer about 15-20% loss of GVA for the year as a whole. This group may contract India’s GVA by about 6-8% for the year 2020-21 as a whole.

Remaining services- trade and commerce, transportation, financial, and hospitality etc.- makes up another about 40% of India’s GVA. Financial services did not suffer much in the lockdown. Trade and commerce suffered massively for the month of April. These services have resumed and are expected to be fully normal by the end of first quarter. Transportation across the entire spectrum railways, buses, airlines, cities transportation etc. was almost totally closed in April, has partially resumed in May and is expected to be about 40-50% of its normal operations in June. This segment will never be same again. The capacity utilisation would be structurally altered as well. About 40% of capacity would most likely be lost. Likewise, hospitality services- hotels, restaurants, food delivery services etc. are also likely to suffer a permanent dent. As trade and commerce and financial services make up about 2/3^rd of the services in this group and these are likely to return normal performance for the year and transportation and hospitality services would be severely disrupted, it will be fair to estimate that about 8-10% of the GVA in this group would get lost in the year 2020-21. This will negatively contribute to contract India’s GDP by 3-4% for the year as a whole.

Putting the sum of parts together, supply side dynamics seem to suggest that India’s GDP will contract by about 10-12% for the financial year as a whole. 

Demand Side Assessment of GDP 2020-21

Let us look at from the demand side of GDP as well.

There are three primary contributors to the GDP from demand side- private consumption, government consumption and investment. Net exports are not likely to be a major factor this year as both exports and imports are likely to trend lower. These three demands contribute approximately 58%, 13% and 29% of GDP from expenditure side.

Investment represented by gross fixed capital formation (GFCF) grew at about 10% in 2017-18 and 2018-19. However, this growth dipped to a low of 1% in 2019-20. Investment activities are seriously impacted in the current year. Capacity utilisation of most industries has been subdued. In such circumstances, industrial investment is likely to be further stepped down. Infrastructure sectors, both in public and private segments, continues to be affected by lack of profitability and performance.

GFCF contracted by about 4% in 2019-20. Demand for making new investments this year is likely to be almost negligible this year except in some digital economy and health sector businesses. Some of existing investments are likely to be stopped and expenditure thereon scaled down. It would be no surprise if the capital formation growth declines by 15-20% in the current year. As fixed capital formation contributes to about 30% of GDP, the impact of this degrowth of 15-20% is likely to contribute to contraction of about 5-6% in India’s GDP for 2020-21.

Government consumption is supposed to play a counter-cyclical role in downturns. Unfortunately, the policy signals emanating from the government suggests that the government is not keen on expanding its expenditures. An analysis of the stimulus package suggests that not more than 1.5 lakh crores of additional fiscal expenditure is expected to materialise out of the stimulus package. The government is also curtailing expenditures budgeted for 2020-21. Category B and C Ministries and Departments have been asked to control their expenditures. Dearness allowance increases for the government employees for the year 2020-21 have been cancelled. If the government succeeds in reducing budgeted expenditure by even 1-1.5 lakh crore, this would neutralise the fiscal stimulus in Aatm Nirbhar package. Assuming that the Government is able to grow its expenditure by about 10-12% for the year as a whole, the government expenditure which is about 13-14% of GDP, it would contribute positive growth of about 1-1.5% to India’s GDP for 2020-21.  

Private consumption has two major parts- essential consumption and discretionary consumption. Essential consumption- food, medical, gas, water and electricity etc.- makes up about 70% of the total consumption or about 40% of GDP. Discretionary expenditure- travel, entertainment, restaurants etc.- makes up for about 20% of GDP. Assuming essential consumption suffers only marginally, though there is lot of pain in evidence in the plight of migrants, the non-discretionary consumption may not see growth but may not fall in the negative territory. Discretionary expenditure has suffered substantial setback in last two months, which is likely to be the case even in the remaining three quarters. It would be no surprise if discretionary expenditure gets contracted by about 25-30% for the year as a whole. Private consumption is likely to contribute negatively of about 5-6% of the GDP as a whole for the year 2020-21.

Putting all these together, India is likely to see about 8-12% contraction from the demand side as well. Capital formation may contribute 5-6% and private consumption another 4-6%. Government consumption might make positive contribution of 1-1.5%.

Factors of Production- Consequential Impairment of Income

There are three real factors of production- labour, capital and government. They share the GDP income. They benefit when GDP grows. Their incomes enlarge, may be in varying proportions. They also suffer when GDP contracts.

India has about 100 crore people in the working age group of 15-64. Only 45% of these working age people looked for work in 2019-20. 6% of these 45 crore workers did not find employment on average in 2019-20. Rest 42-43 crore Indians were working as unskilled labourers, skilled workers, white collar workers, managers, technologists, government servants and in numerous other vocations. There are no good comprehensive studies in India about the share of GDP income which goes to the workers. Annual Survey of Industries 2017-18, which collects data about 2.4 lakh factories and establishments of India places share of all emoluments in value added at only about 35%. Capital has bigger share- about 45% in such industries. This organised industry adds only about 10% of India’s GDP. In the rest of the economy- agriculture, informal manufacturing and services, the share of labour is much higher- probably somewhere close to 75% in the value added. Together, about 65% of GDP income accrues to workers- the largest factor of production and the largest factor of consumption.

GDP income accrues to capital in the form of profits, which are invested in future projects or distributed to shareholders. Roughly about 20% of India’s GDP services the capital. Remaining 15% is the tax to GDP ratio, which is the share of GDP the governments gets as their income.

The lockdown has impacted all the three factors of production. About 25% of the workforce was rendered unemployed- about 10-12 lakh crore workers- in April and May. The impact fell most severely on non-farm, non-government and non-organised sector workers. Such workers are about 15-18 crores. Almost 2/3^rd of such workers lost jobs and their own account establishments (most of these workers are self-employed micro businesses). These workers and businesses- almost all of unincorporated businesses- make up a large part of migrant workforce. The long and heart-rending march of millions of migrant workers back to their roots in villages is the evidence of this massive job-loss. As businesses resume work now, these workers would come back but that would happen quite gradually over next six-eight months assuming there is no out of control coronavirus wave again.

Capital would suffer loss of profit but relatively much less. The capital has the ability, barring those businesses which are likely to be fundamentally altered because of their very unsuitable nature in the context of risk of Covid-19 and other viruses spreading.

Government’s loss of income is already visible. Central Government’s gross tax collections for April have come down. There is no clear sense of CGST revenues. Excise duties on petrol and diesel also suffered by more than 50% in first two months. State governments could collect only about 20% of tax revenues in the month of April. Delhi, which has a large tax surplus, has petitioned Central Government for assistance exceeding Rs. 5000 crores. Government of India has decided to borrow 50% more (about Rs. 4 lakh crores over BE programme of about Rs. 8 lakh crores) essentially to cover revenue shortfall. States have deferred salaries and are struggling to make both ends meet.

Taking all these factors and facts into account, it seems that the government would bear about 25% of the loss of GDP income of Rs. 20 lakh crores i.e. a total loss of about Rs. 5 lakh crores (both centre and states combined). The capital would get away with a loss of not more than 10% of total income loss i.e. about Rs. 1 lakh crore. The workers would bear the rest of it- a whopping loss of about Rs. 14-15 lakh crores in the year 2020-21.

SUBHASH CHANDRA GARG

NEW DELHI 02/06/2020