De-stressing the Indian economy – Economic Stimulus Needed Urgently

11 May 2020

The world is grappling with the COVID-19 outbreak. The conundrum, however, has been safeguarding lives while ensuring economic balance. The manufacturing units, supply-value chains, MSMEs, the hospitality sector, and other critical sectors are struggling to find a strong ground to recuperate from the huge economic loss the outbreak has brought.  By the end of the third phase of the lockdown, we would have lost almost two months of industrial output, roughly equivalent to 8% of GDP a month. Therefore, the industry, especially the MSMEs, workers, and people from the lowest strata of the society are in dire need of a substantive and immediate stimulus package from the government.

The Confederation of Indian Industry (CII) has recommended direct cash transfers of Rs 2.0 lakh crore to the Jan Dhan accounts of the poor to help them tide over this crisis. This should be done in addition to Rs 1.7 lakh crore stimulus already announced. It should be ensured that migrant labourers receive money in their accounts so that they are encouraged to return to the workforce.

Businesses are dealing with a cash flow crunch, and it is difficult to lend wage support to workers. To avoid job losses, enterprises need immediate support. CII has recommended a provision of Rs 2 lakh crore for additional working capital to help enterprises in meeting wage requirements and interest payments for the next three months. Banks should provide enhanced limits, equivalent to April – June wage bill of the businesses, backed by a Government guarantee, at 4-5 per cent interest, with a refinance guarantee from RBI. A similar carve-out could be provided for the April – June interest obligations of the stressed sectors. 

MSMEs are the backbone of the Indian economy and are the worst-hit sectors. CII recommends a credit protection scheme for MSMEs, whereby 60-70% of the loan should be guaranteed by the government i.e. if the borrower defaults, the government should repay the bank up to the amount it has guaranteed, so the risk to the lender is limited. The allocation for this guarantee can be kept at Rs 2 lakh crore, though this may not entirely be utilised. MSMEs also are suffering because of the delayed payments, which are in the range of Rs 6 lakh crore. The outstanding payments should be made on an urgent basis to help MSMEs sail through the crisis.

CII has also suggested the creation of a fund or SPV with a corpus of Rs 1.4-1.6 lakh Crore, which will subscribe to NCDs/Bonds of corporates rated A and above. The fund can be seeded by the Government contributing a corpus of Rs 50,000 crore, with further investments of Rs 40,000-50,000 crore from banks and the remaining Rs 50,000-60,000 crore by financial institutions. This will provide adequate liquidity to the industry, particularly the stressed sectors such as aviation, tourism, and hospitality.

Building public infrastructure could boost demand and create jobs. Rs 4 Lakh Crore could be demarcated for the purpose wherein private investors and investment funds could be roped-in to increase the size of the investment. To begin with, the fund could be utilised for pending projects that would immediately enhance productivity.

CII has sought an allocation of Rs 2 lakh crore to be earmarked for bailing out state-run electricity distribution companies that have been accumulating losses. The banks are also at a higher risk of running into an economic crisis as  their current exposure to the private sector, including MSMEs, stands at Rs 29.05 lakh crore. Therefore, CII has recommended for recapitalising the banks with an allocation of Rs 2 lakh crores to manage any surge in NPAs.

CII has also provided ways to finance the stimulus package to ensure a stable macro-economic environment. It has suggested Rs 4 lakh crore support from the subscription of government paper by the RBI as a possible measure to monetise the government borrowings. An equivalent amount can be curtailed from Government expenditure bills. Borrowings from domestic and foreign sources as well as raising revenues through disinvestments could also be considered to finance the Rs 15 lakh crore stimulus.

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