Details show direct fiscal costs of stimulus measures won't be large

Work from home being a new normal could help in the growth in smaller service sector MSMEs, writes Ranen Banerjee.

A 10% of GDP stimulus--wow! That was the expression I had when I heard it in the address to the nation by the prime minister. There was a clamour for a big stimulus and it could not have got any bigger. But then as the number of zeros after two settled down in my mind, I got worried as to what it would do to the fiscal math, debt stock and consequent implications on the economy. The questions that came to me were what will happen to inflation, will there be a sovereign rating downgrade by a couple of notches, will the exchange rate go out of control, what will it do to the bond yields, will it crowd out private investment and so on. I was therefore eagerly awaiting the speech of the Finance Minister to get to the details and the fine print.

After listening to the speech by the Finance Minister, I am now a little less worried with the questions that were coming to my mind. It is primarily because the total stimulus package details that were announced today add up to Rs 5.94 trillion. However, we need to note that this is not a fiscal outlay for the current year. The direct fiscal costs from the stimulus measures announced are not that large.

If we look at the biggest item of Rs 3 trillion collateral free loans for SMEs, there is no cost to the exchequer this financial year. The banks will do the lending and the only cost will be the NPAs on account of these loans that are being guaranteed by the government, These costs will begin occurring only in the next financial year and that to the extent of the loans going bad. MSMEs getting this collateral free loan would not like to be willful defaulters on these as it will cause their credit records to be spoilt and good performance on servicing these loans may lead to lesser collateral requirements for such borrowers in future. 

Similarly on the next two items of subordinated debt and equity infusion in MSMEs of Rs 20,000 crore and Rs 50,000 crore, respectively, entail an actual outlay of Rs 14,000 crore only. The EPF support for additional 3 months will entail an outlay of
Rs 2,500 crore this year. The reduction in statutory PF limits does not entail any additional outlay. The Rs 30,000 crore special liquidity scheme for NBFCs/HFCs/MFIs also does not entail any additional fiscal burden during this financial year and the implication can come in the year of maturity of these securities in case there is a default and invocation of the guarantee. Similar is the case with the Partial Credit Guarantee scheme. The Rs 90,000 crore of liquidity injection in the discoms will also not entail any additional stress on the fiscal as this money will come back to the central government through the gencos as they will receive this from the discoms. If the receivables of the discoms go bad, it will put pressure on the state budgets as the liquidity infusion to the discoms is expected to be guaranteed by the states. The Rs 50,000 crore liquidity injection through relief on TDS and TCS is also an accouniting issue and it will only impact to the extent of float enjoyed by the government as these got settled in the next financial year with cash basis accounting being followed by the government. 

Thus, the total fiscal outlay for FY20-21 is only to the extent of Rs 16,500 crore. My worries that a Rs 20 trillion of stimulus with about Rs 5 trillion shortfall in revenue collections (including non-realisation of the divestment proceeds of Rs 2 trillion makes it a Rs 25 trillion additional deficit has therefore been laid to rest for the time. 

The government has very rightly focused on the MSMEs that contributes to a significant part of the GDP and employment. MSMEs have been hit badly over the past few years and Covid-19 was like the proverbial last nail in the coffin. The measures announced today will surely provide a new lease of life to the MSMEs. The new definitions will also provide the incentive to the dwarf MSMEs to grow and shed their fears of losing out on benefits upon growing. The services sector MSMEs will benefit greatly with the significant jump in investment and turnover limits and will see a huge boost. The work from home being a new normal could help in the growth in smaller service sector MSMEs. 

(The writer is Leader, Economic Advisory Services, PwC India. The views expressed are personal.)