- MSMEs need money or they'll shut shop - definitely top priority for government
- States are desperate for funds as they deal with revenue loss and additional expenditure due to coronavirus
- Banks need confidence to lend in a high risk environment; recapitalisation will build risk-taking appetite
- India's poor - migrant workers, daily-wage earners - need money to survive
The government's decision to borrow additional funds of Rs 4.2 lakh crore to fight coronavirus means it's readying a war chest for economic stimulus. The total gross borrowing has now been increased from Rs 7.8 lakh crore to Rs 12 lakh crore in FY21.
This is a first hint that the government has assessed its finances based on the loss of budgeted revenues and the expected additional expenditure required on account of coronavirus.
So where will the additional funds be deployed?
Micro, small and medium enterprises (MSMEs) are first in queue as they urgently need money to survive.
The banks' outstanding credit to MSMEs is around Rs 15 lakh crore and they are reluctant to deploy more amid heightened risk environment. Similarly, there are many coronavirus-impacted sectors like MFIs, hospitality, restaurants, transportation, where money has not reached despite surplus liquidity created by the RBI. In fact, the surplus liquidity is flowing back from banks to RBI.
The government will now have the comfort of offering a credit guarantee to banks to lend money or push funds to agencies like NABARD, SIDBI or other institutions who indirectly support the impacted segments. It could also come out with a plan to directly support MSMEs.
The states are the next big claimant. They have been asking for additional grants as they are the ones fighting coronavirus on the ground. The fall in GST collections has hit states' revenues. Their internal sources through liquor and stamp duty have also been impacted due to the lockdown. States' health infrastructure facilities, including temporary set up for coronavirus, need a massive push because of rising cases. The big danger is that the cases are yet to peak. There is also the risk of second wave of coronavirus infections.
The money could also be used to support public sector banks (PSBs) by way of recapitalisation. The banks may be asked to support industries. It should allow them to take little bit of risk with government backing them with capital. They may extend the moratorium benefit and NPA classification norms. The additional capital will especially help the banks as their revenues have been impacted due to deferred EMIs.
The government could either directly pump in capital or use the bond route to support banks, in which case the net hit on the government would be in terms of interest outgo. Under the bond route, the government issues bonds to banks, who pay the subscription to government and when the government gets the money, it redirects it to banks as capital.
There is a large segment of migrants and poor people who need some sort of a direct transfer of money. In the first phase, the government did come out with income support measures. But more funds are needed as lockdown has been extended. Former RBI Governor Raghuram Rajan has estimated a sum of Rs 60,000 crore for transferring cash directly to poor and supporting them by way of food supply through public distribution system.
The government could also start roads and other public works in a big way to create employment and boost economic revival. Road and Transport Minister Nitin Gadkari had earlier hinted that a package for infrastructure would be announced soon. With additional money in its hands, the government can increase the allocation for infrastructure including roads.