70% of Modi’s COVID-19 package outlined with little relief in sight

The migrants, on painful, long walks home, would have thought there would be some relief for them on their way when Prime Minister Narendra Modi announced his Rs-20-lakh-crore COVID19 package. Day 1 of the ‘series of policy announcements’ provided no hope. The informal sector is also wondering what comes next.

Half the money of the PM’s Rs 20 lakh crore relief package has already been spent without much impact. On Wednesday, Finance Minister Nirmala Sitharaman made announcements adding to Rs 4.4 lakh crore but they were mainly credit guarantee schemes for MSMEs (Rs 3 lakh crore) and the power sector (Rs 90,000 crore) and reduction of TDS rates by 25% (Rs 50,000 crore).

This means roughly 70% of Prime Minister’s Rs 20 lakh crore has now been outlined or spent but does not provide much relief to the stressed unorganised sector and the poorest of the poor who have lost their livelihoods due to the COVID-19 crisis.

The question is what will happen to the remaining half and how much of it will actually reach the people. About 12 crore Indians have been rendered jobless by the crisis, more than 9 crore in the informal sector, and about 40 crore need government support to get by. The government did not announce anything that would help them. We only hope that there would be some relief in the coming days.

While credit support for MSMEs and keeping the power sector running were clearly the highlight of the details announced by Union Finance Minister Nirmala Sitharaman, the question of whether this can ensure that there is no collapse in demand remains. In both the cases, there is no clear outgo from the government, save a little money they would have to spend in on the backend.

The Union Finance Minister’s announcement of cutting down of TDS rates by 25% is another zero-cost measure as it just giving people a little money in the short term. It is a smart move because it doesn’t cost the government anything and gives people some additional money to spend but then you would have to pay the tax at the end of the year. This too means nothing in the long-term.

The Finance Minister said she would make a detailed announcement once all announcements have been made but there are serious gaps in the fiscal math of the government. The question is how will the government raise the money to meet new announcements?

Sitharaman skirted questions on how much money has already been spent but estimates by the Indian Express indicate that the RBI has already injected an additional liquidity of Rs 8.04 lakh crore from February to April and an early package of Rs 1.7 lakh crore was announced by the Finance Minister on March 27. Of this, the FM claimed that Rs 52,600 crore has already been given to about 41 crore people. So, effectively about half of the money has already been spent and we don’t see too much impact on the ground.

About Rs 10.26 lakh crore of PM’s Rs 20 lakh crore remained and the Finance Minister made announcements for Rs 4.4 lakh crore and that leaves around Rs 5.9 lakh crore left for the next few rounds of announcements.

While the FM skirted all questions on how the government plans to finance this, it is running short on fiscal space. The Union Finance Minister would ultimately have to answer these questions.

The government revised its market borrowings cap from Rs 7.8 lakh crore to Rs 12 lakh crore earlier this month, which would provide them with an additional Rs 4.2 lakh crore. Estimates by Barclays in Business Standard indicated that the government has space for Rs 1.9 lakh crore on balance sheet for additional spending. That leaves a gap of Rs 4 lakh crore as early estimates indicate that revenue shortfalls are going to be close to Rs 3.1 lakh crore, if not more.

It would be important to mention that the stress on the government’s finances is not just caused by the present COVID crisis, it has been accentuated by this crisis. Signs of trouble were visible in 2019-20, as gross tax revenues saw a contraction of almost 1% from April 2019 to February 2020.

The impact of COVID crisis would not be known unless the government gives us the numbers for GST collections for April and its revenue projections for the year. The 2020-21 Budget has targeted gross tax revenues for 2020-21 at Rs 24.23 lakh crore which was about 12% higher than the Rs 21.63 lakh crore estimated in 2019-20 but we going to be nowhere close to those numbers.

From the looks of it, the COVID crisis is going to hit government revenues and we would be lucky if we get to cross the Rs 20 lakh crore mark. That would be more than what Barclays has estimated. This would mean that the government would have to either borrow more or cut down expenditure in other areas for the remaining part of the financial year, which would hurt growth recovery in the medium to the short term.

While the first episode of Sitharaman’s revival plan was about cosmetic loan guarantees, the question is if she would be able to provide more relief in the coming rounds. The fiscal space is limited for a government which has failed to provide free rail travel to millions of migrant workers who were forced to walk hundreds of kilometres.

The first round of Prime Minister’s Rs 20 lakh crore package does not inspire much. Let’s hope for some relief in the coming episodes.