The Centre has agreed to demands from States to hike their borrowing limits from 3% to 5% of their GDP in light of the COVID-19 crisis, but on the condition that they implement specific reforms.
The fifth and final tranche of the Atmanirbhar Bharat Abhiyan stimulus package, announced by Finance Minister Nirmala Sitharaman on Sunday, also included an additional ₹40,000 crore allocation for the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), and a new policy welcoming private companies into every sector of industry, while limiting public sector enterprises to strategic sectors only. Corporate enterprises were also offered some relief via changes to the Insolvency and Bankruptcy Code (IBC) and the Companies Act.
Atmanirbhar Bharat Abhiyan | First tranche | Second tranche | Third tranche | Fourth tranche
The total package amounts to almost ₹21 lakh crore by the Centre’s accounting, but is heavy on credit-related measures, including ₹8 lakh crore worth of liquidity enhancing measures by the RBI. Some analysts felt that this amounted to double counting as the credit guarantee schemes to support small companies and non-banking finance companies would also tap into the RBI’s measures.
“The final picture shows that of the ₹20.97 lakh crore stimulus package — which amounts to 9.8% of GDP — only ₹2.2 lakh crore can be traced as direct additional budgetary cost to the Central exchequer, while another ₹1.55 lakh crore relates to already budgeted expenditures,” said Ernst and Young chief policy adviser D.K. Srivastava, who is also on the Advisory Council for the 15th Finance Commission.
“The remaining 85% comes from the RBI’s liquidity announcements, credit guarantee schemes and insurance schemes, apart from the structural reforms which are not really stimulus or relief measures.”
The decision to allocate ₹40,000 crore to the MGNREGS scheme in addition to the ₹61,000 crore allocated in the Budget was widely welcomed, as a measure that will support rural livelihoods at a time when returning migrants swell unemployment in the villages.
However, given that States account for 40% of MGNREGS expenditure, including most upfront costs, they will also have to be willing to spend on the scheme.
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State governments have been given more fiscal room in the current crisis with the hiking of their borrowing limits from 3% to 5% of Gross State Domestic Product (GSDP), which is particularly important as GSDPs are likely to contract, further shrinking possible borrowing at a time when States are at the frontline of containment and relief operations.
However, the hiked limits will be conditional on States implementing reforms related to ration portability, ease of doing business, power distribution, and urban local bodies.
The Finance Minister, said both Central and State finances were stressed, which is why GST compensation has not been paid to any States since December, and estimated that the increase in borrowing limits would make extra resources worth ₹4.28 lakh crore available to States. While she noted that States have so far only borrowed 14% of their already authorised limits, analysts pointed out that this limit is meant for the entire year, and nine States have already advanced their borrowing calendars even at a time when the interest on their bonds has shot up to 9%.
“States are paying a high cost for market borrowings, while the Centre’s cost is lower at about 6%. It would have been better for the Centre to borrow from the market and transfer to the States,” said economist Pronab Sen, who is also a former Chief Statistician of India.
He was also critical of the new Public Sector Enterprise Policy as part of a stimulus package, noting that privatising PSUs would find fewer buyers at a time of global recession, while any potential buyer would be spending money which could have gone into fresh investment on a financial transfer instead, effectively contracting demand.
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Announcing far-reaching changes, Ms. Sitharaman said the new policy will notify specific strategic sectors in which at least one PSU will remain, although private companies will also be allowed. PSUs in all other sectors will be privatised. Even in the strategic sectors, no more than four PSUs will be allowed, with the rest being privatised, merged or brought under holding companies.
Other announcements on Sunday included changes to the IBC, to ensure that COVID-19 related debts will not be counted as defaults for the purpose of triggering insolvency proceedings. No bankruptcy proceedings will be initiated for a year. MSMEs will get a special framework to insulate them from insolvency, including a raised threshold of ₹1 crore. Already proposed amendments to the Companies Act, meant to decriminalise violations or shift them to internal adjudication, will now be pushed through the ordinance route, said Ms. Sitharaman.
For the health sector, the Finance Minister promised increased public expenditure including infectious disease hospital blocks in every district and public laboratories in every block, without mentioning any specific financial outlay.
The Centre will also roll out the PM e-Vidya programme for multi-mode access to digital education, including e-content for school education, earmarked TV channels for each class from 1 to 12, and a previously announced plan to let the country’s 100 top universities begin online classes by the end of the month. With widespread mental and emotional stress due to the pandemic, an initiative for psychosocial support for students, teachers and families is also being launched.
