“Atmanirbhar” model’s first tranche needed higher fiscal stimulus: Ex-finance secretary Subhash Garg

Courtesy Subhash Garg
16 May, 2020

On 13 May, Finance Minister Nirmala Sitharaman unveiled a package of 15 measures aimed at supporting an economy battered by the COVID-19 pandemic. These formed a part of the larger stimulus package—the government claims it is worth Rs 20 lakh crore—that Prime Minister Narendra Modi had announced a day earlier. 

Six measures were directed at shoring up the Micro, Small and Medium Enterprises. The highlight among these was a package of Rs 3 lakh crore for MSMEs and businesses that extended an emergency credit line of up to 20 percent over their outstanding credit. This amount would be disbursed via banks and non-banking finance companies. According to another measure, the government will provide a partial credit-guarantee worth Rs 20,000 crore to banks to lend to stressed MSMEs. A third measure is meant to infuse equity—invest in stocks—in MSMEs through a “fund of funds,” a series of interlinked funds. This would have a corpus of Rs 10,000 crore and a promise to leverage Rs 50,000 crore. The details of the FOF were unclear in the announcement. The government also announced that it would launch a Rs 30,000-crore special liquidity scheme for NBFCs, housing finance institutions and microfinance institutions. The measures announced on 13 May will provide a greater credit stimulus to the economy than a fiscal stimulus—increase lending capacity as opposed to the government injecting more money into the economy—according to Subhash Garg, a former finance secretary.

Garg advocated for a greater fiscal stimulus to revive the economy. Garg was appointed the secretary of economic affairs in June 2017 and designated as the finance secretary in March last year. Within five months, he was transferred to the power ministry—this came soon after the ministry of finance floated an idea that the government should raise funds in overseas markets via foreign-currency sovereign bonds. News reports indicated that the Rashtriya Swayamsevak Sangh’s economic wing, the Swadesh Jagran Manch—which staunchly opposed the bonds—played a role in Garg’s transfer. He left the Indian Administrative Services on 31 October by opting for voluntary retirement. 

Garg, now an economic policy analyst, spoke to Tushar Dhara, a reporting fellow at The Caravan, about the measures that Sitharaman announced on 13 May. While the measures seemed to be worth around Rs 6 lakh crores, he estimated the government’s actual cash outflow will be less than Rs 25,000 crore. 

Tushar Dhara: How would you categorise the various measures unveiled by the finance minister on 13 May?
Subhash Garg: The measures unveiled are of two categories. She listed the earlier ones that the Reserve Bank of India did, which totals [around] seven lakh crore rupees. I am assuming it’s a part of the Rs 20 lakh crore. The second part listed measures totalling around six lakh crore rupees.

TD: What are the characteristics of the second part?
SG: There are some very prominent characteristics of this package. The first is that the package aims to provide working capital [cash for day-to-day operations and overheads like rent and wages] support for MSME—through the Rs 3 lakh crore loans and a partial credit guarantee—[and provisions for] power generators and taxpayers. 

The second dominant characteristic is that it is almost entirely delivered through the credit mechanism. This is not fiscal support. So, it is through the banks that you deliver Rs 3 lakh crore, Rs 90,000 crore payments for [the public-sector undertakings] Power Finance Corporation, Rural Electrification Corporation, et cetera. [On 13 May, the government also announced a Rs 90,000 crore liquidity-injection plan for power distribution companies.]

The third characteristic is that there is very little fiscal output for the present. Take the Rs 3 lakh crore [package]. The loans are for a period of four years, guaranteed by the Government of India, and have a moratorium of one year [on repayment of the principal amount]. Depending on how much credit is actually delivered and the quantum of loans that are not repaid after a year, you will have to wait till the end of four years to judge whether the loans are non-performing or not. It is only after [four years] that there will be an impact [on the outgo from the government exchequer].

The fourth characteristic is that there are some aspirational things which may not see the light of day. For instance, the fund of funds for [infusing equity in MSMEs worth] Rs 50,000 crore. How it works is that the government invests in the fund of funds. That in turn invests in an MSME fund which will provide support to small and medium enterprises. 

But India has [around] Rs 600 crore of committed [to invest] in SME units. So, by no stretch of imagination you can raise that to Rs 50,000 crore. You cannot even raise Rs 1,000 crore [of SME investment] in a year. It is very unlikely to take off. Similarly, the partial credit-guarantee scheme has not taken off for a year, it is very unlikely to do so now. 

TD: What is the difference between credit stimulus and a fiscal stimulus?
SG: A stimulus is intended to give rise to demand in the economy. Demand is of two types. Consumption demand [means] more money in the hands of the people to buy more goods and services. And investment demand—businesses are able to make new investments, expand production, et cetera. These are the two basic kinds of stimuli and these come from two sources. The government can make additional income available to businesses and households by reducing income tax or providing a subsidy. This is the fiscal stimulus. A credit stimulus is where banks provide more credit to businesses to [facilitate] more investments. 

TD: What is the direct outflow of money from the first tranche of measures?
SG: There are no direct fiscal implications for the current year except for a very minor outgo. There is no direct outgo from the central government, except for one measure, which is the declaration to pay Employee Provident Fund contributions for three months. [The measures include payment into EPF accounts for a period of three months, which will cost the exchequer Rs 2,500 crore.]

TD: So, the other measures rely on extension of existing bank credit?
SG: That’s right. 

TD: What is the actual amount of fiscal stimulus?
SG: Very small. I estimate less than Rs 25,000 crore in money terms for the current financial year. 

TD: And this credit may be utilised or unutilised? It is not a direct outgo of money from government coffers?
SG: Yes, it will have to be seen in the future what the effect is. It is more of a credit stimulus.

Banks always have liquidity at hand. This is not new creation of money, because banks are already sitting over substantial amounts of undelivered credit. 

TD: Why is that?
SB: There is no appetite for credit in the economy right now. Banks are parking their funds with the RBI rather than lending it out in the economy to businesses and individuals. Liquidity is the ability to lend—you use that to deliver credit. There is a lot of liquidity available, but delivering it in the form of credit is becoming difficult. [In a period of four weeks after the lockdown began] there was a de-growth of [bank] credit by about Rs 1 lakh crore. And it was because banks were not lending money, but parking it with the RBI at a lower interest rate. 

TD: What do you think about the measures for NBFCs, microfinance institutions and housing-finance companies?          
SG: The Reserve Bank of India had made funds available to provide support worth about Rs 50,000 crore for investment-grade NBFCs. [Investment grade is a level of credit rating for stocks, bonds and companies which denotes minimum default risk.] The banks chose to provide those funds only to AAA-rated companies [referring to the highest possible credit rating]. 

Now the government intends to reach the support to other investment-grade NBFCs and HFCs which may not be AAA. The government is in effect providing additional comfort to banks saying, “Please stand guarantee. In case your loans are not paid back by the NBFC or HFC, we will pay you back.” That is the guarantee being offered. It depends on the bank whether they will avail the offer. The intent is that bank finance should reach to NBFCs that are investment-grade, but lower down in the scale. 

TD: Why is the need now more for a fiscal stimulus than a credit stimulus?
SG: People have lost a lot of income. Seventy percent of the economy remains shuttered, companies cannot produce or sell. More than ten crore workers have lost their jobs and their incomes have got affected. When there is so much loss you need a fiscal boost to even make up [for] the loss. This is such a big shock that the requirement for a stimulus or support from the government is much bigger. 

This interview has been edited and condensed. 

Tushar Dhara is a reporting fellow with The Caravan. He has previously worked with Bloomberg News, Indian Express and Firstpost and as a mazdoor with the Mazdoor Kisan Shakti Sangathan in Rajasthan.