Loan Guarantees Not Economic Stimulus

New Delhi: The first tranche of announcements by Finance Minister Nirmala Sitharaman on May 13 should not be described as an economic stimulus package but as a series of loan guarantee schemes. The immediate outflow from government coffers would be negligible. 

In his address to the nation at 8 p.m on May 12, Prime Minister Narendra Modi announced a “special economic package” to make Indians “self-reliant” at a time when the deadly coronavirus pandemic continues to cripple the country’s people and break the back of its economy. 

He said: “This package, together with the earlier announced package by the government during the Covid crisis along with the RBI’s (Reserve Bank of India’s) decisions during the same time, is (going to be) worth approximately ₹20 lakh crore, which is nearly 10% of India’s GDP (gross domestic product).” 

According to the first advance estimate of the National Statistical Office (NSO) in the  Ministry of Statistics and Programme Implementation, India’s GDP at current prices in 2019-20 is likely to attain a level of ₹204.42 lakh crore against ₹190.10 lakh crore in 2018-19.

The Prime Minister mentioned the amount ₹20 lakh crore quite a few times during his speech. Modi said that beginning May 13, the Finance Minister would announce details of this package over the next few days that would focus on “land, labour, liquidity and laws.” He added that the package might include tax exemptions to Micro, Small and Medium Enterprises (MSMEs).

The RBI, in its seventh bi-monthly Monetary Policy Statement for 2019-20, stated that following a meeting of its Monetary Policy Committee (MPC) in February, an amount of ₹2.8 lakh crore of liquidity had been injected through various instruments and schemes till 27 March. The total amount works out to around 1.4% of the country’s GDP.

The RBI stated that through Targeted Long Term Repo (repurchase option) Operations (TLTRO) and changes in the Cash Reserve Ratio (CRR) of banks and the Marginal Standing Facility (MSF), a total liquidity of ₹3.74 lakh crore (equivalent to 1.8% of the GDP) would be injected into the country’s monetary system. 

[The Repo rate is the interest rate at which the central bank, or the RBI, advances loans to banks and is considered an instrument to control money supply and inflation. The CRR is the specific minimum proportion of the total deposits of customers that banks have to hold as reserves with the RBI. The MSF is a liquidity adjustment facility created by the RBI in May 2011; the MSF rate is the one at which banks borrow overnight funds from the RBI against specified government securities.]

The RBI further said that depending on the outcome of the first TLTRO auction, more auctions will be announced. The CRR and MSF windows would be open till the last week of June.

To sum up, the country’s central bank and apex monetary authority announced plans to inject liquidity equivalent to 3.2% of India’s GDP or ₹6.54 lakh crore through these measures.

On April 17, the RBI announced new refinancing facilities for All India Financial Institutions (AIFIs) by extending advances at the policy repo rate when it is being availed. Under this plan, ₹25,000 crore has been allocated to the National Bank for Agriculture and Rural Development (NABARD) to refinance rural banks, ₹15,000 crore to the Small Industries Development Bank of India (SIDBI) and another ₹10,000 crore to the National Housing Bank (NHB) to support housing finance companies, cooperative banks and microfinance institutions. The total adds up to ₹50,000 crore. 

Ten days later, on April 27, the RBI announced a Special Liquidity Facility for Mutual Funds (SLF-MF) worth ₹50,000 crore. The refinancing of AIFIs and the SLF-MF together works out to around 0.5% of the country’s GDP.

Earlier, on March 27, the Union government announced a Covid-19 “stimulus” package that was said to be worth ₹1.7 lakh crore (or around 0.85% of GDP).

In other words, measures aggregating ₹9.24 lakh crore had already been announced before the Prime Minister’s May 12 announcement. Of this amount, the measues totalling ₹7.54 lakh crore announced by the RBI do not striclty fall within the purview of the Union  government’s budget.

On May 13, in a 90-minute media briefing, Finance Minister Sitharaman, along with the Minister of State for Finance Anurag Thakur, detailed what was described as the “first tranche” of the “special economic package” to build a self-reliant India or an “Atma-Nirbhar Bharat Abhiyan.”

The 15 announcements were:

1. A ₹3 lakh crore Emergency Working Capital Facility for Businesses, including MSMEs.
2. A ₹20,000 crore Subordinate Debt Facility for Stressed MSMEs.
3. An infusion of equity capital worth ₹50,000 crore through an “MSME Fund of Funds.”
4. Changes in the definitions of MSMEs.
5. No issuance of global tenders for government purchases of up to ₹200 crore.
6. Extending support for payments to the Employees Provident Fund (EPF) schemes for organised sector workers for an additional three months (that is, for June, July and August 2020).
7. Reduction in contributions to the EPF by employers and employees for three months from 12% to 10% of wages.
8. A ₹30,000 crore Special Liquidity Scheme for Non-Banking Finance Companies (NBFCs), Housing Finance Companies (HFCs) and Micro-Finance Institutions (MFIs).
9. A ₹45,000 crore “partial” credit guarantee scheme for the liabilities of NBFCs and MFIs.
10. A ₹90,000 crore liquidity injection scheme for electricity distribution companies or Discoms.
11. A “relief” scheme for contractors by extending up to six months the time taken for completion of contractual obligations, including with respect to EPC (engineering, procurement, construction) and concession agreements.
12. A relief scheme for real estate projects by extending the registration and completion dates by up to six months. 
13. Pending income tax refunds to charitable trusts and non-corporate businesses and professions to be issued immediately.
14. A reduction in the rates of TDS (Tax Deduction at Source) and TCS (Tax Collected at Source) by 25% for the remaining period of the current financial year (FY 20-21) ending on 31 March 2021.
15. Extension of deadlines and due dates for various tax related compliances.

Loan Schemes, Not Stimulus Package

The 15 schemes outlined do not constitute an “economic stimulus package” as has been claimed by a section of the mainstream media. A country’s economy can be stimulated when its government increases its spending, reduces taxes and brings down interest rates, among other measures, to boost consumer spending thereby increasing the demand for goods and services and in the process, creating jobs. Little of all this is likely to happen through the “first tranche” of measures that were announced on May 13. The additional spending from the government’s coffers would be negligible and it remains to be seen whether the policy changes would help restart stalled economic activities and revive closed ventures.

Through the ₹3 lakh crore Emergency Working Capital Facility for businesses, including MSMEs, the government will provide additional working capital (20% of the outstanding loan amounts as on February 29, 2020) in the form of term loans by banks/NBFCs at a lower interest rate, without any collateral, with a 12-month moratorium on repayment of the principal amount, to companies with an annual turnover less than ₹100 crore and with an outstanding credit limit lower than ₹25 crore. 

The concerned account should not be one where there has been default on repayments or become a non-performing asset (NPA). The maximum allowed tenure of the loans is four years. The government of India will cover banks/NBFCs with a 100% guarantee (on both the interest and principal components of the loans) for these new loans, which the lending institutions can encash in the event of a default. 

At first glance, this seems like a very good initiative. But its success depends on whether owners of corporate entities, notably MSMEs, will want to borrow money from banks/NBFCs at this juncture to invest in ventures for which there will be demand for the goods produced or services rendered. As far as the government is concerned, it is spending nothing immediately for building up a contingent liability for the future that has to be serviced over many years. Even in a worst-case scenario (assuming that 20% of the loan accounts default), the outflow from the government’s coffers will be a small fraction of the total amount of ₹3 lakh crore.

The ₹20,000 crore scheme for providing Subordinate Debt for Stressed MSMEs is meant for MSMEs which are functioning as well as units with stressed assets and/or NPAs. The government expects banks/NBFCs to provide subordinate debt equivalent to 15% of the promoters’ existing equity capital, subject to a limit of ₹ 75 lakh. Under this scheme, the government will support the Credit Guarantee Trust for Micro and Small Enterprises (CGTMSE) to the tune of ₹4,000 crore, which is 20% of the total amount the government is expecting the banks to disburse. 

In this instance as well, the government is not spending anything immediately but expecting banks and financial institutions to lend money without charging interest. As in the previous scheme, the government is building up a very limited contingent liability that is a fifth of the total expected disbursal. 

The question is whether banks and financial institutions that have been reluctant to extend new credit lines because they have been doubtful if their loans would be repaid and serviced, would now come forward to lend large amounts to large numbers of corporate entities, especially MSMEs. The answer to this question is not clear. 

As far as the ₹50,000 crore equity infusion scheme through the MSME Fund of Funds is concerned, the government is planning to set up a Fund of Funds (FoF) with a corpus of ₹10,000 crore to provide equity funding support to MSMEs. The FoF, that will be operated through a Mother Fund and a few Daughter Funds, is expected to mobilise ₹50,000 crore.

This scheme, too, is one with medium-term and long-term consequences. For example, in 2016, the government had set up a Fund of Funds in SIDBI with a similar corpus of ₹10,000 crore for contribution to various Alternative Investment Funds (AIFs) registered with the Securities and Exchange Board of India (SEBI) that would extend funding support to start-ups under government’s “Startup India” scheme. 

The initial plan was to build a corpus of ₹10,000 crore over the terms of the 14th Finance Commission (April 2015 till March 2020) and the 15th Finance Commission (2020-25) subject to the progress of the scheme and availability of funds. The SIDBI website shows that after nearly four years, that is, as on March 31, the Fund of Funds had committed ₹3,798 crore in 53 AIFs and had supported 338 startups with ₹3,582 crore (or over a third of the corpus).

Reduction in EPF Contributions 

Considering the reduction in the contributions to the EPF by employers and employees for the next three months, the mandatory EPF contribution of 12% (for both employees and employers) has been reduced to 10% and will be paid by the Union government. According to the Finance Minister, this will provide liquidity of ₹2,250 crore per month for the next three months or a total of ₹6,750 crore.

A reduction in the EPF might give more leverage to the employer in terms of his/her monthly fixed outflow but for an employee, it is a loss in her/his savings. Moreover, in the private sector, there is no government contribution in the EPF other than the interest in the deposited amount. 

In this case, a reduction from the mandated 12% will save the government money in the form of interest while the additional money in the pockets of employees that will be spent will help the government earn more by way of indirect taxes. As there is no salary slab mentioned, many people may lose a chance to save on payment of income tax because the contribution to the EPF is counted as a tax-saving instrument. 

Benefits to Tata, Adani and Reliance ADAG

Coming to the ₹90,000 crore liquidity injection scheme for power distribution companies or discoms, this amount will be infused by two public sector undertakings, the Power Finance Corporation and the Rural Electrification Corporation in two equal instalments. The discoms are expected to use this money to clear their dues with power generation and transmission companies. The respective state governments should guarantee these loans to the discoms. It has been reported that the discoms owe ₹94,000 crore to electricity generation and transmission companies. 

This move will provide relief to many power generation companies, such as Adani Power, Reliance Power and Tata Power. However, what is being advanced is a loan from two public sector companies that will have to be repaid. Once again, there is no government contribution here.

No New Capital Infusion

The ₹30,000 crore special liquidity scheme for NBFCs/HFCs/MFIs is being provided by the RBI. Investments will be made in primary and secondary market transactions in investment grade debt papers of these NBFCs/HFCs/MFIs and 100% guaranteed by the government of India. Yet again, there is no fresh infusion of capital from the government.

As for the ₹ 45,000 crore partial credit guarantee “Scheme 2.0” for the liabilities of NBFCs/MFIs, the government will provide 20% “first loss sovereign guarantee” to public sector banks to cover the borrowings of low-rated NBFCs, HFCs and MFIs. This scheme, too, entails no new expenditure on the part of the government.

Cut in TDS, TCS Rates Tricky

Consider now the reduction in rates of TDS and TCS by a quarter for the remaining period of the current financial year (FY 20-21). The TDS rates for all non-salaried payments to residents (that is, payments for interest, professional fees, dividend, contract, rent, brokerage, commission, etc covered under this scheme) will be reduced by 25%. The implications for individual taxpayers are a bit tricky.

TDS is basically an advance tax which gives the government an idea of the number of tax-payers in advance. However, when income tax returns are filed at the end of the year, one has to pay the actual tax according to the slab one falls under. For example, if ₹5,000 TDS was deducted on a transaction of ₹50,000 earlier, the amount deducted will now be only ₹3,750. But whether or not a taxpayer will actually save ₹1,250 on the transaction will be known only at the end of the financial year when the person files her/his income tax returns. This is  because one will know the actual tax slab or bracket under which she/he will come under at that juncture. So, if a person come under the 10% income tax slab/bracket, she/he will have to fork out 10% of her/his taxable income, partially neutralising the savings made on account of a lower TDS rate.

Is this a significant benefit for income taxpayers who comprise barely 2.5% of India’s population of 135 crore? Should this change in TDS and TCS rates be included as part of a “package” of “economic stimulus” measures? Many would disagree.

Sitharaman also announced that pending income tax refunds to charitable trusts and non-corporate businesses and professions would be made immediately. This is not such a big deal as is being sought to be made out as, after all, this is money that is owed by the government in the first place. 

The 15 schemes worth ₹6 lakh crore announced by Sitharaman on May 13, together with the schemes announced by the RBI on April 17 and the government on March 27, add up to ₹9.24 lakh crore or less than 5% of India’s GDP.

(To be continued.)