Modi’s big bang theory: Can Rs. 2,000,000 crore stimulus rescue industries?

As India moved towards unlock India 1.0, Indian government unveiled a 20-trillion-rupee ($266 billion) fiscal and monetary package in a series of five tranches. Industry experts present their opinion on India’s $266 billion economic stimulus package.


A mammoth rescue economic stimulus of 20-trillion-rupee ($266 billion) announced by government of India last week is claimed to be 10 per cent of the GDP, but economists say that the direct fiscal layout amounts to even less than 1 per cent of GDP. Industry sectors came up with mixed reactions when asked about the first impression of the economic package.  “It is definitely a relief package which covers various sections of the society from individuals to corporates,” feels Aparna Rammohan, Treasurer at TiE Chennai and MD of Srisattva Group.  

In terms of spending as a share of GDP, 6.4 per cent or Rs 12,95,450 crore has been committed to food security; direct cash transfer; money for rural job guarantee scheme; and credit guarantee to MSMEs among others.  The government has also announced a policy rate cut and other measures to boost liquidity at 3.9 per cent of the GDP or Rs 8,01,603 crore in terms of monetary and micro-financial assistance.  

Welcoming the steps Aparna opines, “Primary advantages to MSMEs offered by the government in the announced package are focussed on improving cash flows. While tax rates have not been slashed, TDS rates have been reduced extensively. The subsidies and grants are not offered but loans at reduced interest rates are now available.”   

Talking about expectations of real estate sector, Dr. Samantak Das, Chief Economist and Head of Research at JLL India comments that real estate sector has expected more support from the government. But, the package has three good provisions overall which will help industries to revive. He says, “First measure among these is liquidity infusion, second is fiscal support to enhance demand, and third is reforms driven infrastructure advancements. Hence, $266 billion package will support MSMEs as they are core of our economy.”  

“In my opinion, the stimulus package is positive for MSMEs. The measure in turn will bring back lot of confidence in the real estate sector since it comprises of numerous small businesses in form of developers, builders and suppliers. The package is good for MSMEs but is not precise when it comes to sectoral aspect of real estate,” he further added.  

Similarly K. Satyanarayana, Co-founder & Director, Ecom Express Private Limited touted the economic stimulus package as a well-timed initiative focused to boost supply chain and skills in order to enhance ‘growth and build a self-reliant India.’ “The much-needed relief targeted at SMEs, MSMEs, manufacturing and agriculture is going to boost allied and connected industries such as logistics and supply chain,” he said.   

However, as an immediate relief measure government has allowed delivery of non-essential items too by e-commerce portals in all three zones during lockdown 4.0. Satyanaryana further professes, “This will facilitate e-commerce dedicated logistics players like us in fulfilling the consumer needs of both essential and non-essential goods through a contactless delivery.  Despite this glimmer of hope, the logistics industry is also going through testing times.  Therefore, government support through structured incentives would give required impetus to this ailing sector at large.’’   

Discontent for Package Across Industries   

However, the economic package which largely focuses on liquidity measures and doesn’t contain steps to boost demand and consumption failed to impress sectors and business leaders. According to the experts, the package rests mostly on boosting company credit but contains scanty public spending, tax breaks, or cash support to revive demand and prevent firms from collapsing.  

Businesses from airlines to small stores are waking from a slumber of nearly two-month’s lockdown aimed at limiting the spread of coronavirus. Many firms say they won’t survive unless they are bailed out immediately. The government however has said that it would privatise state-run companies in non-strategic sectors and stop fresh insolvency cases for a year.  But, these steps are not adequate to prevent a likely 5 per cent contraction in Asia’s third-largest economy in fiscal 2020/2021, Goldman Sachs claims.  

It thereafter stated that the economy is expected to shrink at an eye-watering 45 per cent on an annualised basis in the quarter towards end of June. Announcements such as including loan guarantees for small businesses, to provide free food grains for workers, or to additional MNREGA amount are very meagre when it comes to market expectations. Experts from various fields point out that these are not enough. “We are creating all sorts of liquidity for supply, but what about the demand,” said Kiran Mazumdar Shaw, chairperson of Biocon Limited in a statement.  

“Demand is going to play a very big part in the economic revival. If we are not able to refuel demand, I fear than we will not witness economic revival at all. I think we have lost a big opportunity,” she adds. A breakdown of the economic stimulus package shows that the actual spending of government is only about a tenth of the $266 billion, which Modi has hailed as 10 per cent of India’s gross domestic product when compared to stimulus plans announced by other major economies.  

A large part of rest of the package consists of loans provided by banks, many of them without collateral. This leverages $105 billion of liquidity provided by the central bank. “We would not qualify it as a stimulus package. Only 1 per cent of GDP is given to compensate for the income loss, which is very unlikely to be sufficient,” claims Sunil Tirumalai of brokerage firm Emkay Global while reacting on the package. One percent of GDP would amount to about $29 billion and the government may have spent less than that fearing a sovereign rating downgrade.  

Tanked Sensex a Constant Worry  

Indian shares tumbled with banks leading the fall because of disappointed investors in just one day. On last Monday, slew of announcements made by FM Sitharaman caused the NSE Nifty 50 index fall from 3.05 per cent to 8,857.90 by 0530 GMT. The S&P BSE Sensex slid from 3.09 per cent to 30,137.63. The Nifty 50 slipped below the 9,000 level for the first time since April 22. The Nifty banking index fell by 6.25 per cent and was on course for its worst day in two weeks. The top five beneficiaries on the Nifty 50 were lenders, HDFC Bank Ltd fell 4.7 per cent, while ICICI Bank Ltd fell by 8.1 per cent.  

Commenting on the package, Deepak Jasani, Head of retail research at HDFC Securities in Mumbai confesses, “Our economic recovery will be very slow and labored. People generally were expecting immediate spends to revive the economy, which is not happening now.” The announcement that India would stop fresh insolvency cases for a year to avoid bankruptcies, couldn’t prevent banking stocks of firms hit by the COVID-19 pandemic from plunging.  

“It will affect slippages and recoveries for banks in a big way,” Jasani said while referring to a fresh jump in bad loans. Analysts have also pointed out that the measures amount to a limited fiscal spending. Although such steps provide businesses and workers with liquidity, they will do a little to stimulate consumption demand and provide a boost to economy in the short term. Most of the business leaders, analysts, and experts in the respective fields are of strong opinion that the package would only be able to give results after a certain time. Currently, industries need an immediate respite which this package doesn’t offer.   

An Immediate Relief Package Required, Feel Exporters 

Responding to the overall economic package Sharad Kumar Saraf, President of Federation of Import Export Organisation (FIEO) expresses his thoughts, “Though the overall stimulus package announced by the government has been encouraging and will help in medium to long term, there still remains concerns with regard to stimulating demand and tackling supply and supply chain disruptions. That would have been a key to giving boost to the overall trade and industry immediately during such challenging times.”  

Welcoming other steps Saraf said that the measures will work out in the long term. He further said that the need of the hour was to provide an immediate bailout package both in the form of a direct and indirect incentivisation for trade and industry especially in the exports sector. These steps should be implemented in order to enhance ease of doing business in India and to attract Foreign Direct Investment thereby making India both manufacturing and export hub.   

He also demanded that exports may be provided an additional MEIS of 2 per cent for the entire sector and 4 per cent for its labour-intensive domains and the implementation of the new RoDTEP scheme to help the exporters in such difficult times. “Government should allow a rollover of forward cover without the interest or penalty and an automatic enhancement of the limit by 25 per cent to address liquidity challenges. This should be along with creation of much-awaited Export Development Fund for marketing of brand India products across the globe,” added Saraf.  

On the other hand, apparel export industry demands the government to treat them at par with MSME. Dr. A Sakthivel, Apparel Export Promotion Council of India (AEPC), Chairman wrote a letter to Prime Minister mentioning their challenges, “We would request that the apparel exporting industry may be treated at par with the MSME sector as we work on wafer-thin margins of 4-5 per cent with a high-labour force and with labour wages forming 25-30 per cent of the product cost. Herewith, we request you to kindly consider the following at par with MSME sector.”  

The apparel export industry is one of the largest employers of the country employing 12.9 million directly. It is also one of the largest employers of women forming 65 per cent of the workforce. The apex body welcomes the step on the extension of EPF contributions under the economic package i.e Pradhan Mantri Garib Kalyan Package (PMGKP). However, association suggests granting benefit irrespective to the number of workers employed.  

“It is strongly suggested that this benefit should be granted irrespective of number of workers employed and more specifically to cover all the apparel exporting units who may kindly be notified as eligible establishments, since they are highly labour intensive with a huge women workforce. A large number of our exporters lost huge money by booking forward contracts and we feel that the loss can be converted into a working capital-term-loan with a repayment in three years at a 6 per cent interest rate,” the chairman added.  

Retail Industry Disappointed Too   

Retail industry that contributes around 40 per cent to India’s consumption and 10 per cent to India’s gross domestic product is severely strained too. The Retailers’ Association of India (RAI) expressed its disappointment with the Atma Nirbhar Bharat economic stimulus saying that emergent issues of retailers have not been addressed.  Retailers are staring at closure of businesses that would jeopardise livelihoods and jobs of 46 million direct employees, out of which 20 million individuals work in non-essential retail.  

“The steps taken under the Atmanirbhar Bharat economic stimulus will help the country in the long term but the emergent issues facing the retail industry have not been addressed,” RAI Chief Executive Officer, Kumar Rajagopalan said in a statement. He further adds, “What retailers needed was wage support; moratorium for payment of principal and interests; and support in the form of working capital. This is critical for retail to survive.” 

Reiterating that retailers need working capital in their hands to retain employment, Rajagopalan confesses, “The relief measures offered to MSMEs (micro, small and medium enterprises) by the government do not help retailers as retail is not a part of the MSME sector. Lack of support will result in closure of businesses, and jeopardise livelihoods and jobs of 46 million direct employees, out of which 20 million work in non-essential retail. The industry does not have an ability to support them with no income and zero support from the government.”  

Displeased Traders Seek Reconsideration 

Indian traders also look not so pleased with the economic package. On the behalf of seven crore traders in the country, the Confederation of All India Traders (CAIT) is demanding reconsideration of the economic package to include relief measures for traders. CAIT wrote a letter to FM seeking a reconsideration of the package. According to CAIT officials, the package is not supportive of traders and has ignored the trading community at the time when their businesses are on the verge of closures.  

CAIT wrote a letter to FM seeking a reconsideration of the package. CAIT National President, B. C Bhartia and Secretary General, Praveen Khandelwal said in a statement, ”The traders of India have stood firmly with the government and people of India in these troubled times to ensure continuous supply of essential commodities so that every citizen had substantial supplies during lockdown. The traders feel that government has let them down by non-inclusion in the much-awaited economic package.”   

A Sidelined Auto Sector   

The regulatory body of Society of Indian Automobile Manufacturers (SIAM) says that they have been sidelined in the economic package. The association said that automobile industry is in dire need of an immediate stimulus to ‘boost demand and stop job losses.’ The auto manufacturers were looking forward for some direct fiscal measures from centre in Rs 20 lakh crore stimulus package because of that.   

While welcoming the focus towards MSMEs, NBFCs and the agri-sector in the package, Rajan Wadhera, SIAM President says, “The agri sector package may benefit the auto sector indirectly in the medium term but the Indian automotive industry needed an immediate stimulus to boost demand which has not happened.” The Indian automotive industry supports employment of more than 3.7 crore people and contributes to 15 per cent of GST amounting to Rs 1.50 lakh crore every year.  

Talking about despair of auto sector, Wadhera comments that the sector was already ‘facing an unprecedented challenge with 18 per cent growth last year.’ According to the assessment made by SIAM on the impact of COVID-19 on demand for vehicles in the current financial year, the sector could experience a decline between 22 per cent to 35 per cent in various industry segments, if the overall Indian GDP growth is at 0-1 per cent for FY 21.   

“It is against this background that the industry was keenly looking forward to some direct fiscal measures which could have boosted demand for the auto sector and stop job losses,” he reclaims.  Auto industry had specifically demanded stimulus, including reduction in base GST rates from 28 per cent to 18 per cent for a limited period. They had also demanded an incentive based vehicle scrappage policy. According to him, these measures ‘would have made it a less painful revival and kick started the industry.’   

Healthcare has been ignored

The industry body FICCI said that the announcements made in the economic package are initiatives that will help in enhancing the healthcare capacity of our country in future. Such steps do not provide any respite from the crisis originated due to the pandemic.  The healthcare sector has been already under acute financial as well as physical strain during past couple of months and hence expected an immediate relief measure. While the government has been considerate towards agriculture, the healthcare sector which is the epicentre of relief measures in this ongoing crisis has been ignored completely. 

The hospitals that were financially fragile over past few years have been stressed with unplanned investments for COVID-19 preparedness and response. Further, they have seen their revenues topple due to 60 to 80 per cent decline in patient footfalls. This has resulted in estimated operational losses of 4500 crores per month (at 50 per cent revenues and 35 per cent occupancy levels).  

Many small hospitals and nursing homes in tier II & III cities had to put their shutters down due to challenges of liquidity and cash flow. Association tells that it is extremely important to put measures into immediate implementation in order to make their impact effective in the coming 3 to 5 years. The increase in public spending on healthcare should be increased to at least 2.5 per cent of GDP since this has been assured in the National Health Policy 2017. 

On the other hand massively hit tourism industry has gained no breather with the package. The industry is likely to witness thousands of job cuts and small firms going bankrupt, the Federation of Associations in Indian Tourism and Hospitality added. Indian airlines are bearing an average daily loss of $10 million-$12 million and will need extra funding of 325 billion-350 billion rupees ($4.3 billion-$4.6 billion) in next two years, the renowned ratings agency ICRA, a unit of Moody’s tells.  

Limited Resources with Government  

According to the government officials the government estimates total spending of $27 billion from the budget this year for rescue measures. This would prevent the fiscal deficit from widening more than 100 basis points beyond the target of 3.5 per cent of GDP. The finance ministry should also assess the scale of intervention required if the coronavirus pandemic drags for longer than what currently was expected. 

“We do not know how the situation would evolve or how long it will go on for. We need to prepare for that as well, as the government has limited resources and needs to spend wisely,” said one of the officials on the condition of anonymity. Distress is hence mounting across the economy. Emkay Global estimated the cost of the lockdown at around $170 billion overall. With the lockdown now extended to the end of May, it appears that the road back to economic health is going to be long and hard. “A steep fall in output this year is certain and we continue to believe that the recovery will be slow,” concludes Shilan Shah from Capital Economics, an economic research consultancy.   

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