The PM announced a package of Rs 20 lakh crore. It took the FM 5 sessions to explain the details. In this blog I have tried to explain the Rs 20 lakh crore story.
It is normal for most actions of the PM (“feku”) to have ingredients of ambiguity, deceit & some percentage of truth. We then get analysis explaining the hidden truth by knowledgeable people who tell the correct things; it is countered by massive propaganda in support of the PM which adds to the confusion. This story is no different. I work in the field of psychology. The traits apparent about our PM & FM are as follows:
· PM has no hesitation in lying openly. He knows that his lying does not affect his popularity because his supporters are quite comfortable with it. After all our beloved PM lied openly about NRC from Ramlila Ground in front of a huge crowd apart from the numerous lies he tells as a routine.
· PM is very scared of giving money in the hands of the people. He desperately wants to keep the fiscal deficit low. If the government’s revenues are falling and borrowings have to increase he will make all efforts to hide these facts. It is my conjecture that he feels that high fiscal deficit will deter foreign investment & he probably feels that foreign investment is his last refuge.
· PM feels that by hiding data about unemployment, farmers’ suicides and GDP he can keep the façade of “sab changa si” going.
· PM apparently does not understand that if there is reduction in demand then government revenues will get reduced because domestic demand contributes approximately 60% of the GDP in India.
· I am sure our FM understands the economics but rates her personal ambition above national interests & thus supports wrong policies.
· This “raw wisdom” of our PM is against common economic sense.
· I have to concede to one logic of our PM & that is, if Indians have chosen him as the PM then they should be prepared to suffer his incompetence-be it a four hour notice for demonetisation or for lockdown of the country without any discussions or consultations.
· Such actions help to build the image of a “strong, 56 inch-chest, macho leader”. Only a very strong leader would cause suffering and deaths of lacks of poor without remorse and keep celebrating his soaring popularity built through false propaganda.
Understand the Math of 20 lakh crore Story
I found the most reliable figures given by P Chidambaram in his article. The link is given below. Let us understand the math. First let us see the fiscal part which works on the demand side:
· Planned government expenditure in Budget 2020-21: Rs 30,42,230 crore.
· Planned borrowing was: Rs 7,96,337 crore.
· Planned fiscal deficit was 3.5% of GDP.
· On 08 May the government admitted an additional borrowing of Rs 4.2 lakh crore, taking the total borrowing to Rs 12 lakh crore or 5.3 % of GDP.
· The planned revenue in the budget was as it is over-optimistic, considering the GDP anticipated was 10% and the anticipated disinvestment was Rs 2.1 lakh crore.
· Tranches announced by the FM:
· First tranche was assessed as Rs 3,60,000 crore.
· Second tranche yielded Rs 5,000 crore.
· As per Chidambaram’s assessment the following points stand out:
· The additional borrowing would be used to fill the shortfall in the revenue.
· The cuts announced so far will save the government Rs 41,490 crore and will be available for Covid-19-related expenditure.
· There is nothing heard about termination of the Rs 20,000 crore Central Vista Project or the aircrafts for the PM project of Rs 8,000 crore or for that matter there is no clarity about any other cuts planned in the government expenditure.
· The additional expenditure (not budgeted earlier) has been Rs 60,000 crore in cash transfer and Rs 40,000 crore as the value of grain.
Let us now see the liquidity math, which works on the supply side:
· Additional liquidity support of Rs 5.24 lakh crore was provided by RBI.
· Since March 27 banks have parked an additional Rs 4.14 lakh crore. This clearly indicates that borrowings will definitely be subdued.
Support for Farmers in Stimulus Package
A large number of agriculture reforms were announced in the third tranche & were praised in various fora. The highlights were:
· Rs 1.63 crore outlay to strengthen infrastructure and logistics.
· Proposed amendment of The Essential Commodities Act to deregulate trade in cereals, edible oils, oilseeds, pulses, onions and potatoes. Stock limits for these will be imposed only in exceptional circumstances.
· A new central law will be formulated to provide barrier-free inter-state trade of farm produce and more freedom for farmers to sell directly or even online.
Comments: The stimulus provided is Rs zero. The reforms are sensible and should/could have been done in 2014. I do not think the agriculture sector will benefit in any significant manner.
Support for MSMEs
· The total outstanding payments to MSMEs, as on March 31, 2020, were pegged at upwards of Rs 4.95 lakh crore, according to government estimates. FM said the Centre and Central PSUs would clear pending MSME dues in 45 days.
· “Many Central, state governments, PSUs, corporates owe almost Rs 5.5 lakh crore to MSMEs and almost 30 per cent of it are due over 120 days, 45 per cent are between 60 to 120 days and rest below 60 days. We request the Finance Minister to consider settling the dues with interest so that it will apply pressure to pay as soon as possible,” said K E Raghunathan, former National President of All India Manufacturers Organisation.
· MSMEs, which make up for about 45 per cent of the country’s total manufacturing output, 40 per cent of exports, almost 30 per cent of the national GDP and operate across the value chain. They employ an estimated 11 crore persons, are stressed due to depleting internal reserves and low visibility of demand.
· The Union government said it would provide MSMEs an additional and full guarantee of ₹3,00,000 crore in the next five months—about 10 times of what it gave in 2018-19.
· MSMEs were expecting a cash hand-out, payment of employee wages, or tax waivers. Instead, the government is telling them to borrow some more, albeit on easier terms, to reboot.
· There are various challenges:
1. Eligibility. Only a small pool of MSMEs will effectively be eligible for this working-capital facility: those that have existing loans. They can now borrow up to 20% more of their loan outstanding on February 29, 2020. FM expected 45 lakh units to resume business. According to government numbers, there were about 63.4 million MSME units in 2015-16, accounting for about 28% of the GDP and 30% of India’s labour force. About 99% of these enterprises have invested less than ₹25 lakh in their business. Most of these ‘micro’ enterprises will not be eligible for this additional liquidity.
2. Low Borrowings. Even before the Indian economy landed in a corona-coma, credit growth to MSMEs was on the decline. According to a TransUnion CIBIL report, at the bottom end of the MSME spectrum (enterprises with a loan book of below ₹10 lakh), year-on-year growth had dropped from 18% in the December 2018 quarter to 6% in the September 2019 quarter. Similar declines were seen even at the top end of the MSME band.
3. Potential NPAs. In the absence of due diligence, companies can misuse this facility in collusion with bank-branch officials and politicians. A pile up in bad assets of public-sector banks means they will need more capital, for which they will turn to a cash-strapped government.
The FM has announced an additional allocation of Rs 40,000 crore for MGNREGA, in addition to the budgeted Rs 60,000 crore. This is a good step. More fund should be allotted (World Bank’s recommendation is about 1.7 % of GDP) and employment duration guarantee should be increased to 200 days.
Persons Left Out As Per Report of Chidambaram
The persons left out of the stimulus package are:
· Migrant labour.
· Laid off workers.
· Self-employed, who lost their job.
· Poorest families who survived from hand to mouth.
· Lower middle class which ran out of cash 7 had to borrow.
· The left out 5.8 crore MSMEs.
Other Major Aggrieved Parties
· There is nothing for the corporate sector in manufacturing or services.
· The distressed sectors such as airlines, automobiles, hotels, restaurants, and tourism have been ignored.
· As per CMIE data unemployment is approximately 27%. The figure would come out in several crore. If several crore people get work, they will buy goods & services. This will increase demand & will contribute to the GDP.
· MGNREGA is the best tool to provide employment in rural areas. A parallel for urban areas could be started on priority to generate employment.
· Government’s plans are primarily focused on providing loans to business persons to start work & generate employment. When a business person is not assured of demand then he will be reluctant to produce goods & services. Hence this plan is apparently flawed.
Relevant Points Raised by Chidambaram
· If there is no additional borrowing, there can be no additional expenditure and, logically, no fiscal stimulus.
· All over the world, additional borrowing is the key to fiscal stimulus: borrow more and spend more, and if the borrowing reached an uncomfortable level, monetise part of the additional borrowing/deficit, that is, print money.
RBI Governor is right in assessing that we are heading towards a recession. The global situation is worse than the Great Depression of 1930. India, unfortunately, has an incompetent government, which had given us eight quarters of falling GDP due to its inept handling of the economy. Naturally it is incapable of having an effective plan to tide over a serious crisis which is likely to wipe off about 10 lack crore from the GDP in the current financial year. The highlights of our incompetent government’s outlook have been:
· 21 day lockdown to beat COVID-19.
· Meaningless slogans coined by the PM like: “jaan hai to jahan hai”, which soon shifted to “jaan bhi Jahaan bhi”, “Atmanirbhar Bharat Abhiyan” & “vocal for local”.
This government is incapable of tiding over the medico-economic crisis. Chidambaram’s advice is absolutely correct but the government will not take it.
Advice for Citizens
Please build pressure on the government to stop fooling the country with falsehoods and provide a package of approximately Rs 10 lakh crore (borrowed or printed money) to help people survive and start working. This simple step is essential to force the government to save India. If we, the citizens, fall for our beloved PM’s diversionary issues like Hindu-Muslim & Ram Mandir then we are heading for a very bleak future, which is difficult to imagine.