Finance Minister’s Rs 5.94 Lakh Crore Package Is Prudent; It’s More About Relief Than Revival And Costs Very Little

The first instalment of the relief package of Rs 20 lakh crore announced by the Prime Minister the other day was delivered by Finance Minister Nirmala Sitharaman yesterday (13 May). To be sure, this is more like the third instalment, for the liquidity easing measures and first fiscal package came in February-March.

The Reserve Bank of India (RBI) offered liquidity support measures worth Rs 7.8 lakh crore in February and March, while Sitharaman gave us her Rs 1.7 lakh crore fiscal support package for the needy towards end-March, after the first lockdown was announced.

In yesterday’s package, which in terms of the headline number works out to just under Rs 6 lakh crore, the key feature is fiscal rectitude. Of the Rs 594,250 crore of liquidity and fiscal relief measures announced, the actual amount of money being spent by the exchequer is not more than Rs 16,500 crore immediately.

The rest of the package is essentially liquidity support with loan guarantees in some cases, where the fiscal payouts may happen only in future years, and that too to the extent some borrowers go bust or are unable to repay.

Here’s the math.

The main elements of the package are a Rs 3 lakh crore guaranteed loan package to benefit 45 lakh micro, small and medium enterprises (MSMEs); Rs 20,000 crore as subordinated debt to help support stressed MSMEs which will benefit another Rs 2 lakh firms; a Rs 50,000 crore corpus for an MSME-oriented Fund of Funds; Rs 30,000 crore of liquidity for non-bank finance companies (NBFCs), housing finance companies, and micro-financial institutions; a Rs 45,000 crore partial credit guarantee scheme for NBFCs; Rs 90,000 crore of liquidity for stressed power distribution companies (DISCOMs), and Rs 50,000 crore of tax deduction at source (or tax collection at source) relief through a 25 per cent reduction in the TDS/TCS rates.

Additionally, the Centre will pay for another three months (June-August) the Employees Provident Fund Organisation (EPFO) amounts usually paid by employers and employees who earn upto Rs 15,000 monthly (72 lakh to benefit).

The statutory contributions of the rest will be cut from 12 per cent to 10 per cent for both employees and employers for three months, which will benefit 4,3 crore formal sector employees.

While the first scheme will cost the exchequer Rs 2,500 crore, the reduction in the PF contributions of the rest of employees will not cost the Centre anything; the cash flow relief to employees and employers for three months will end up reducing the overall accumulations in the employees’ EPFO corpus.

In the Rs 50,000 crore Fund of Funds for MSMEs, the Centre’s contribution initially will be Rs 10,000 crore. In the Rs 20,000 crore subordinated debt plan to fund stressed micro and small enterprises, the Centre will pay Rs 4,000 crore initially.

Add the PF amount of Rs 2,500 crore that the Centre will pay on behalf of those earning below Rs 15,000 monthly, the Rs 10,000 crore contribution to the Fund of Funds, and the Rs 4,000 crore for the subordinated fund for MSMEs, and the actual fiscal hit in the near term is just about Rs 16,500 crore.

The rest of the package, which is about liquidity enhancements and loan guarantees, will hit the fisc only when bank loans go bad, or some MSMEs which benefited from the Rs 3 lakh crore guaranteed loan package are unable to repay.

In short, the fiscal hit will happen in stages, possibly from 2021-2022 onwards.

The Rs 50,000 crore reduction in TDS/TCS payments will improve cash flows for both individuals and firms who receive such payments, but it does not cut the final amount of taxes payable.

For example, if you are a freelance writer earning Rs 3 lakh from writing articles for newspapers, the TDS earlier was Rs 30,000 at 10 per cent. This TDS rate is now cut to 7.5 per cent, and the newspaper will cut only Rs 22,500 from its end. But, at the time of filing returns, the TDS you can adjust against will also be lower if your total income is, say, Rs 10 lakh from multiple sources.

The Rs 90,000 crore liquidity facility for DISCOMs is not a freebie either; states will have to guarantee the repayments.

If one were to add the Rs 7.8 lakh crore liquidity enhancement facilities provided by the RBI, the Rs 1.7 lakh crore package provided by Sitharaman in March, and the Rs 5.94 lakh crore package announced yesterday, Rs 15.44 lakh crore of the Prime Minister’s Rs 20 lakh crore Covid-19 relief and revival package is already accounted for.

In the remaining parts of the package, to be announced in two or three instalments, the thing to watch is how much of the balance Rs 4.56 lakh crore actually gets fiscally funded into the hands of citizens and businesses.

This is a fiscally astute government, and one suspects that the actual Covid-19 fiscal largesse will not exceed Rs 5 lakh crore, including the Rs 1.7 lakh crore already announced. This would be around 2.5 per cent of the GDP, and entirely rational and affordable.

The bottomline is this: the package so far is about relief, not necessarily revival. Industry will be hoping that the remaining Rs 4.56 crore will be more about revival and not just liquidity support.