The central government is all set to announce the next round of "financial relief package" to tackle the economic fallout of the coronavirus pandemic. The announcement could come next week, according to sources.
A top source in the government, who has been part of the strategy-making, said, "The discussions and deliberations at the top level on the package were over almost a week ago."
The final round of discussion on the stimulus package took place on May 2 between Prime Minister Narendra Modi and Finance Minister Nirmala Sitharaman along with officials of the ministry.
Sources say senior PMO officials have been working on final tightening of nuts and bolts of the relief package and the next step could be the announcement.
The source, on condition of anonymity, added, "Not all measures which are part of the package need a Cabinet clearance. There are some proposals which will need Cabinet nod. There has been no Cabinet meet for the last two weeks. So one can say this Wednesday there may be a meeting."
To prepare the financial system for the big move next, Finance Minister Nirmala Sitharaman will meet CMDs and CEOs of public sector banks on Monday.
According to sources, the agenda of the meeting may include credit flow, credit sanctions, and disbursements since March 1 and four other items.
Govt to borrow more to fund stimulus package
On Friday, the government had indicated that the funds for the long-awaited financial relief package were going to come from additional borrowing from the market. It had declared that it would raise its borrowing by over 50% of Budgetary Estimate (BE) during 2020-21. Economic Affairs Department under the Finance Ministry said, "The estimated gross market borrowing in the financial year 2020-21 will be Rs 12 lakh crore in place of Rs 7.80 lakh crore as per BE 2020-21." The government resorts to such borrowing to bridge the gap between its income and expenditure.
This provides ample evidence that the government has shed its reluctance to breach the fiscal deficit target. Following this level of borrowing, the fiscal deficit during 2020-21 could go up by 200 basis points (bps). 100 bps translate to 1 percentage point.
What could be in the package
Last week, the government sources had confirmed that "a package with proposals and implications," had travelled some time ago from the North Block office of the finance ministry to the PMO in South Block.
Various concerned departments like the Department of Financial Services, which deals with banking and related issues, is said to have already submitted their report vis-a-vis measures, implications, and procedures.
Ministries like MSME, labour and others have also sent in their proposals and responses.
Various sources in the government and its advisory entities claim that the package focuses on relief, rehabilitation and revival post lockdowns and COVID-19 impact on the economy. PM and his office have held a series of meetings with different ministries, departments and statutory bodies like the RBI.
Sources have been stating that a "Big Bang" package has not been government's first choice and it has been opting for "targeted packages" for different sectors and segments in a phased manner with active involvement of the RBI.
Relief for MSME
The PMO is said to have drawn a comprehensive proposal for the micro, small and medium enterprises (MSME) sector that may address both the stress on the entities plus those who work in them. The ministry of MSME had sent multiple proposals for the sector and the PMO is said to have taken the final call.
To help the MSMEs, the government is said to be working on providing a guarantee for additional funding of 20% of the credit limit of medium and small entities. This may involve the government guaranteeing over Rs 3 lakh crore loans.
Once the government steps in as guarantor, banks will be incentivised to lend to MSMEs. A senior government official said, "Using the loans once, MSMEs kick start operations defaults will not be instant. They may occur only after the deep distress forced by coronavirus spread abated. The department of financial services is said to have submitted its report to the PMO on this proposal."
The MSME ministry had submitted proposals like setting up of a special fund to pay up the banks in case of defaults and using the credit guarantee trust to operate the assistance.
The government is actively considering ways to address both the supply and demand side of the crisis. Sources say the fiscal relief measures may have strong elements to address the workforce and migrants like those who resorted to protests in various parts of the country or are fleeing back to their native places in large numbers.
The other key proposal for the MSMEs has been a direct assistance in the form of wage support for workers to reduce the burden on the entities.
Top government sources confirmed the existence of a proposal for MSME getting "payroll support" for employees drafted by the NITI Aayog. This has potential to immediately address the large scale retrenchment and job losses that are being reportedly causing hardships. More money in the hands of the labourers can trigger demand for goods produced by industries and businesses which have been given a go ahead to start working with social distancing protocols.
The target of this could be nearly 10 crore workers. The labour ministry has already cleared deferred payment of employers' contributions in the EPF to reduce the burden on MSMEs.
The government also said to have on its table a proposal to put money in the hands of the poor and needy.
The opposition and experts have been suggesting that the Centre must target the bottom 30-40% of the economic strata, which includes daily wagers and migrant labourers.
Ex-Finance Secretary Subhash Chandra Garg in an article recently estimated that the government needs to spend nearly Rs 60,000 crore to provide at least Rs 2,000 direct cash transfer to nearly 10 crore workers for three months.
Sources said that several tax and other incentives have been under consideration for over a month to provide a helping hand to large industries and corporates. Manufacturing services and industry provide 42% of employment but their contribution to GDP exceeds 70%.
The move by the government is expected to set the tone for the economy. The government's fiscal moves will also decide the next move by the RBI on the monetary front. The RBI sources indicated that the "central bank will now wait for the government's fiscal measures to address the economic distress before deciding its next monetary intervention."
The RBI governor Shaktikanta Das on April 17 had announced a slew of measures to improve credit flow and liquidity.
More reforms coming?
Over the last few days, PM Modi has held several rounds of meetings with ministers, officials and stakeholders. His focus has been on a post COVID scenario in which India could position itself as a competitive manufacturing destination in comparison to China.
The government is working on proposals to bring in greater foreign direct investment (FDI), improve ease of working, and system reforms to make India more lucrative for companies exiting China following the COVID-19 outbreak. Sources say that announcements on these lines are also in the pipeline.
Sources said that PM has held discussions for interventions in the financial sector and structural reforms along with a strategy to support MSMEs and farmers, liquidity situations and ways to strengthen credit flows.
A business' recovery plan is said to have become the mantra in the government and the PM, according to sources, has been flagging the need for generating gainful employment opportunities by helping businesses overcome difficulties and strengthening major structural reforms.