Saturday, May 23, 2020

Actual fiscal stimulus in India

On 12 May 2020, Prime Minister Narendra Modi announced a special economic package worth INR 20 lakh crore (INR 20 trillion or about USD 267 billion), which taken together with the earlier announcements by the government and RBI is equivalent to about 10% of GDP, with a focus on a self-reliant India (Atmanirbhar Bharat). On 26 March 2020, the government had announced an economic relief package (PMGKP) worth INR 1.7 lakh crore while the RBI offered liquidity support of INR 3.7 lakh crore in March and INR 2 lakh crore in April. 

The Atmanirbhar Bharat Abhiyan (ABA) has five pillars and will focus on land, labor, liquidity, and laws.
  1. Quantum jump in economy 
  2. Modern infrastructure
  3. Technology-driven system/reforms
  4. Vibrant demography
  5. Strong demand 
The main idea is to build back better so that the eventual economic recovery is better than before and India is better positioned to respond to any future health or natural crises. Some of the measures (such as direct cash transfers and food subsidy) are designed to negate the effect of crisis such as COVID-19. The reform measures will not only enhance efficiency across sectors, but also ensure quality and push India towards a self-reliant economic regime. 

The government is aiming for bold reforms in supply chain in agriculture, rational tax system, simple and clear laws, competent human resource, and a strong financial system. Make in India campaign will benefit from these reforms as the emphasis is on meeting demand locally but competitively. The expectation is that these measures will lead to the emergence of confident and resilient India that depends on its strengths and also integrates with the global economy. 

Following up on PM Modi’s announcement, on 13 May 2020, Finance Minister Nirmala Sitharaman, provided details, in five tranches (Part 1, Part 2, Part 3, Part 4, and Part 5), of the comprehensive package. 

The extra fiscal spending will be a fraction of INR 20 trillion as most are related to providing or leveraging liquidity, providing guarantees, and regulatory tweaks. The guarantees and backstops increase contingent liabilities on government, to the extent they are utilized. The following table gives an overview of the estimated fiscal cost or stimulus (1 USD = INR 75).

Self-reliant India movement economic package
Sectors
INR crores
USD billion
Fiscal stimulus or cost
Before May 13
Revenue loss due to tax concessions since 22 March
7,800
Tax relief
PMGKY
          170,000
22.7
102,600
Emergency Health Response Package
15,000
2.0
15,000
Total
192,800
25.7
Tranche 1-For businesses including MSMEs
MSMEs
Emergency collateral-free working capital facility
          300,000
40.0
Subordinate debt for stressed MSMEs
20,000
2.7
4,000
MSME Fund of Funds
50,000
6.7
10,000
EPF
Extend EPF support for 3 more months
2,500
0.3
2,500
Reduction in employer & employee contribution to 10% from 12% for 3 months
6,750
0.9
Tax relief
NBFCs/MFIs
Special liquidity scheme for NBFC/HFC/MFIs
30,000
4.0
Partial credit guarantee scheme
45,000
6.0
20% of loss if incurred
DISCOMs
Liquidity injection
90,000
12.0
Tax relief
TDS and TCS reduced by 25% for FY2021
50,000
6.7
Tax relief
Total
          594,250
79.2
Tranche 2-For poor, including migrants and farmers
Migrant workers welfare
Free food grains supply to migrant workers for two months
3,500
0.5
3,500
Farmers and small businesses
2% Interest subvention for 12 months for Shishu MUDRA loanees
1,500
0.2
if incurred
Credit facility for street vendors
5,000
0.7
if incurred
Extension of Credit Linked Subsidy Scheme under PMAY (Urban)
70,000
9.3
if incurred
Additional emergency working capital for farmers through NABARD
30,000
4.0
if incurred
Concessional credit to PM-KISAN beneficiaries
200,000
26.7
if incurred
Total
310,000
41.3
Tranche 3-Formalizaiton of Micro Food Enterprise (MFE)
Strengthen infrastructure logistics and capacity building
Agri Infrastructure Fund
100,000

100,000
Formalizaiton of Micro Food Enterprise (MFE)
10,000
10,000
Pradhan Mantri Matsya Sampada Yojana (PMMSY)
20,000
20,000
Animal Husbandry Infrastructure Development Fund
15,000
15,000
Promotion of herbal cultivation
4,000
4,000
Beekeeping initiatives
500
500
TOP to TOTAL
500
500
Total
150,000
20.0
Tranche 4-New horizons of growth- Structural reforms in eight sectors
Social infrastructure VGF
8,100
8,100
Total
8,100
1.1
Tranche 5-Government reforms and enablers
MGNREGS
40,000
40,000
Total
40,000
5.3
RBI measures-actual
801,603
106.9
Grand total
2,096,753
279.6
335,700
Share of total
16.0
FY2020AE NGDP
2,998.6
22489420
Share of NGDP FY2020AE
1.5

When the size of fiscal stimulus is expressed as share of GDP, then one confusion is which year’s nominal GDP to use. If folks use FY2020 advanced estimate of nominal GDP, then it may not be correct because nominal GDP is sure to decline as the advance estimate was released before COVID-19 pandemic. But then, if folks revise FY2020 nominal GDP downward then the size of fiscal stimulus as a share of GDP will increase compared to FY2020 AE. If folks are using FY2021 nominal GDP forecast, then the variability in size of fiscal stimulus is unsurprising. Furthermore, note that some of the fiscal stimulus may not be realized in FY2021 itself. So, expressing fiscal stimulus as a share of GDP is not uniform across estimates by different organizations. That said, most of the estimates are between 1-2% of GDP. 

While some argue that the economic package is inadequate to address the economic challenges, other counter that it is appropriate for the time being

Tuesday, May 12, 2020

Indian states are amending laws to attract investment

Several Indian states are now amending labor and land laws to attract investment in the post-COVID-19 era, especially targeting those companies that want to shift production from PRC or want to create a second line of supply chain. 

Amending the Land Reforms Act of 1961, Karnataka government now allows firms to buy land directly from farmers. Previously, firms would get government allotted agricultural land. 

The industries will still be required to seek permission from the revenue department. It will, however, be deemed approved if the deputy commissioner doesn’t raise red flags or clear the application within 30 days. Earlier, industries could get agricultural land allotted only through government agencies. The amendment was notified after the Karnataka governor approved the Karnataka Land Reforms (Amendment) Bill, 2020, that had been approved by the legislature in March. The April 27 gazette notification repeals the related Karnataka Land Reforms (Amendment) Ordinance 2019. On January 25, chief minister BS Yediyurappa had said the government would amend Section 109 of the Land Reforms Act to facilitate industry to purchase land directly from farmers. 
“A three-year process now takes just about 30 days -- a major reform that we’ve been demanding for long. Tamil Nadu, Andhra Pradesh and Telangana have been allowing this for a while now. We are glad the CM understood our concerns. A lot of credit must go to the principal secretary of commerce and industries department and the industries minister,” CR Janardhan, president, FKCCI, said.

Recently, Uttar Pradesh government amended its labor law, exempting businesses from the purview of almost all labor laws for the next three years. Hire and fire is easy now. 

The laws that are relaxed include those related to settling industrial disputes, occupational safety, health and working conditions of workers, and those related to trade unions, contract workers, and migrant labourers. However, Building and Other Construction Workers Act, 1996; Workmen Compensation Act, 1923; Bonded Labour System (Abolition) Act, 1976; and Section 5 of the Payment of Wages Act, 1936 (the right to receive timely wages), will remain intact for both the existing businesses and the new factories being set up in the state. The state government’s statement said that the decision is taken in the wake of losses incurred to businesses and economic activities.


Here is a brief snapshot of the changes in some states:
  • Madhya Pradesh: Only one register and the return sufficient to take business license now instead of the requirement to fill 61 registers and 13 returns. Overtime allowed up to 72 hours and working shift increased to 12 hours from 8 hours. No inspection in firms employing less than 50 workers. In SMEs, inspection to take only with the permission of labor commissioner or in case of complaint.
  • Uttar Pradesh: Labor laws relaxed for the next three years. No need to worry about inspection or enforcement, among others. 
  • Rajasthan: Increased working hours to 12 hours from 8 hours a day. Amended Industrial Disputes Act to increase the threshold for lay-offs and retrenchment to 300 from 100 earlier. Trade union recognition only after 30% membership (up from 15%).
  • Maharashtra: Firms allowed to submit consolidated annual returns instead of multiple returns under various labor laws.
  • Kerala: State government will facilitate new industrial licence application within a week if firms agree to complete formalities in a year.
  • Punjab, Himachal Pradesh and Gujarat: Amended Factories Act to increase working time to 12 hours a day and 72 hours a week. 

Saturday, May 9, 2020

Addressing high NPAs caused by COVID-19 pandemic

Arvind Subramanian and Josh Felman argue that there will be a significant deterioration of bank's balance sheet, which would heighten financial sector stress. Around December 2014, there was twin balance sheet challenge: banking sector and infrastructure firms had come under severe financial stress. Now, stressed balance sheets has risen to four: NBFCs and real estate sectors in addition to infrastructure firms and banks. The economic fallout of COVID-19 pandemic has pushed households, firms and financial sector into stress as income and revenue have fallen dipped. A significant increase in NPAs is a very likely scenario.

How bad is the damage likely to be? Reports suggest that around one-third of industrial and service firms have applied for moratoria on their bank loans. If only a quarter of these deferred loans eventually go bad, then the stock of non-performing assets (NPAs) would increase by Rs 5 lakh crore. And this is a conservative estimate. Senior bank officials have been quoted as estimating that the stock of NPAs could increase by as much as Rs 9 lakh crore. In this case, we would be looking at NPAs of Rs 18 lakh crore, equivalent to around 18 per cent of current loans outstanding. For planning purposes, it is worth considering who will pay for such losses, if they do materialise.

Someone will have to pay for the rise in NPAs and to facilitate credit. The government's own fiscal position is stressed with rising fiscal deficit and outstanding public debt. Increasing taxes may not be an ideal policy now. 

They suggest acknowledging the stress faced by households, businesses and government in the first place, and take steps to minimize losses by creating a guarantee fund to support lending, and by resolving defaults quickly. The strategy is to sort out bad loans quickly.

First, by preventing bankruptcies from occurring in the first place. To do this, banks will need to identify the firms that are viable, and lend them the funds they need to tide them over the immediate crisis. But banks are facing their own difficulties, and are reluctant to bear the risk of making such loans. So, the government might need to create a guarantee fund to support lending, as one of us has proposed.
Second, when firms do default, they need to be resolved as quickly as possible. Speed is necessary because the financial position of stressed firms tends to worsen over time. By definition, stressed firms have poor cash flows and can’t obtain much in the way of loans from banks. So, they don’t have enough money to fund their operations properly, which means that over time their underlying business deteriorates, destroying the firms’ market value. 

Tuesday, May 5, 2020

Land provision for investment and shortage of workers after lockdown

From The Times of India: India is developing a land pool nearly double the size of Luxembourg to lure businesses moving out of China, according to people with the knowledge of the matter. A total area of 461,589 hectares has been identified across the country for the purpose, the people said, asking not to be identified because they aren't authorized to speak to the media. That includes 115,131 hectares of existing industrial land in states such as Gujarat, Maharashtra, Tamil Nadu and Andhra Pradesh, they said. Luxembourg is spread across 243,000 hectares, according to the World Bank.
Land has been one of the biggest impediments for companies looking to invest in India, with the plans of Saudi Aramco to Posco frustrated by delays in acquisition. Prime Minister Narendra Modi's administration is working with state governments to change that as investors seek to reduce reliance on China as a manufacturing base in the aftermath of the coronavirus outbreak and the resultant supply disruption.
[..]The government has hand-picked 10 sectors -- electrical, pharmaceuticals, medical devices, electronics, heavy engineering, solar equipment, food processing, chemicals and textiles -- as focus areas for promoting manufacturing. It has asked embassies abroad to identify companies scouting for options. Invest India, the government's investment agency, has received inquiries mainly from Japan, the US, South Korea and China, expressing interest in relocating to the Asia's third-largest economy, the people said.

Labor shortages to hit industrial sector in India

After the massive reverse migration during the lockdown, restarting factories might be a challenge in urban and peri-urban areas due to shortage of workers. Migrant workers are being offered goods welfare package back in their own states to deal with the hardship caused by the COVID-19 pandemic and lockdowns. Attracting them back to workplaces might require offering higher incentives, which many MSMEs may not be able to afford. Here are a few implications outlined in an article in The Economic Times.
  • Insufficient labor could severely impact construction operations even if supply of materials normalizes in the next few weeks
  • There will be stress on logistics and local distribution. 
  • The India Cellular & Electronics Association expects 30% normalcy by the end of May. Foxconn has got approval to resume production with 10% workforce, but getting labour is turning out to be a big challenge
  • MSMEs could resume with just 20-25% capacity
  • Food processing would be affected severely due to the shortage of workers and difficulty in getting working capital loans at low interest rates. Retailers usually have stock for just 3-4 weeks.
  • Export shipments are being hit due to shortage of workers. In two days, around 10,000 workers engaged at Kandla had registered to return to native states.
  • Most workers are unlikely to return for the next three months once they reach home. Local leaders in Uttar Pradesh, Bihar and Rajasthan need to appeal to the workers to stay put in their places of work
Here is chart from Mint showing the sectors badly hit by shortage of workers:

Sunday, May 3, 2020

Covid-19: Impact and response

It was published in The Kathmandu Post, 03 May 2020.


The strict lockdown to contain the spread of SARS-CoV-2 and supplies disruptions are wreaking havoc on the economy. It is going to push many vulnerable households below the absolute poverty line and will likely increase inequality. According to the latest projections, gross domestic product growth will fall sharply to 2.3 percent in the fiscal year 2019-20, much lower than the 7.1 percent last fiscal and the government’s pre-Covid-19 target of 8.5 percent.

A sudden lockdown, coupled with the lack of contingency plans to smoothen consumption, supplies and housing, has inflicted appalling hardships on migrant workers and the poor and vulnerable. Similarly, businesses are facing financial stress or are outright bankrupt. The economy urgently needs a fiscal relief package for the vulnerable population and micro, small and medium enterprises (MSMEs), followed by a recovery package after the spread of Covid-19 is largely contained. However, effective last-mile delivery—that actually reaches the intended beneficiary households and businesses—is a huge challenge due to weak accountability and targeting mechanisms.


During the lockdown, over 90 percent of economic activities have come to a grinding halt. The latest projections show that the agricultural, industrial and services sectors are projected to grow by 2.6 percent, 3.2 percent and 2 percent, respectively. These numbers are drastically lower than the growth these sectors experienced last fiscal year.

The economy was already weak before the lockdown and social distancing measures were implemented. For instance, a delayed monsoon, shortage of fertilisers, use of substandard seeds and an armyworm invasion dented agricultural output before the Covid-19 pandemic. The pandemic exacerbated the situation through agricultural inputs crunch (such as workers and fertilisers), especially to harvest winter crops, connect to agricultural markets, and prepare for summer crops.

Similarly, weak capital spending and the lack of an investment-friendly environment affected industrial output before the pandemic. The Covid-19 outbreak in Nepal happened to exacerbate the situation as it hit in the second half of the fiscal year—the period when a majority of economic activities occur. No wonder, mining and quarrying, manufacturing and construction activities are expected to contract in the current fiscal year. Work from home norms do not apply to these activities and productivity losses will continue to linger for some quarters.

Within the services sector, a deceleration of remittance income and decline in imports were already affecting retail and wholesale trade, which has the second-largest share in the GDP. After the pandemic, this sub-sector is expected to grow by just 2.1 percent, down from 11.1 percent last fiscal. Travel and tourism-related activities such as hotels and restaurants, and transport, storage and communications are expected to contract. Other services activities that are badly hit are financial intermediation, real estate and business activities, and education. Note that casual workers and informal sector firms, mostly MSMEs, are concentrated in the services sector.

Overall, consumption has been subdued, and fixed public and private investments are contracting. The government’s 2.3 percent growth estimate for the fiscal year might itself be a bit optimistic because it assumes that the affected economic activities, except for international tourism-related activities, will start to pick up pace from mid-May. But this is highly unlikely, owing to the uncertainties over Covid-19 contagion, unfavourable external factors (decline in remittances and foreign direct investment), difficulty to quickly reverse the dispersal of workers, and supply disruptions.

This crisis will increase the fiscal deficit because of lower than expected revenue mobilisation and nominal GDP growth, and higher than expected expenditure needs. Inflation may rise, but not to the extent seen during previous crises as depressed consumer demand will somewhat counteract cost-push inflationary pressures arising from a shortage of goods and services. Similarly, a decline in exports as well as imports, and deceleration of remittance inflows might have a net effect of reducing the current account deficit. However, foreign exchange reserves will fall. This is not good, as it jeopardises external sector stability.

Importantly, since a large proportion of the households are clustered just above the absolute poverty line, an income shock due to the Covid-19 will push many of them below the poverty line. It will also potentially widen inequality because the poorest households are disproportionately affected. Note that over 62 percent of the employed workforce is in the informal sector and about 85 percent of them are employed informally—that is, those who do not have paid annual leave or sick leave benefits and whose employers do not contribute to their social security. Social protection problems, as well as unemployment, are going to exacerbate as mass internal layoffs and returning migrant workers increase in the coming weeks. The unemployment rate was already over 11.4 percent and the labour underutilisation rate, which includes unemployed, time-related unemployed and potential labour force, was even higher at 39.3 percent.

Crisis response

Given the enormity of the emerging health, social and economic problems, a well-coordinated and synchronised relief and recovery package is of urgent need. Extraordinary circumstances require exceptional measures, but the government’s economic response has been ordinary at best.

A detailed relief and recovery package is missing. The immediate-term focus should be to stabilise aggregate demand and to lower the burden on workers due to unemployment and income shock. These are best done through the expansion of social protection measures and easing regulatory as well as liquidity constraints faced by MSMEs. After Covid-19 pandemic subsides and is largely contained, a full economic recovery package is required to help struggling businesses and workers. This is also a time to think of import-substituting production and the diversification of sources of economic growth and poverty reduction.

Further, although the fiscal space is already tight, thanks to expansionary redistributive budgets in the previous years, there should be no confusion about financing Covid-19 related measures by tweaking expenditure allocation. Of course, revenue mobilisation will be lower than projected and so will be spending. But, a repurposing of the recurrent budget (especially those allocated to use of goods and services) and capital budget (allocated for vehicle purchase, consultancy, land acquisition and some civil works) is still possible. The government can issue bills and bonds as planned and raise the required money for immediate needs.

It can be used to expand unemployment and other social security-based direct cash transfers, boost healthcare spending, provide relief to farmers, subsidise food and daily essentials, guarantee credit on additional working capital for MSMEs, subsidise employee retention, cover the short-term interest on loans taken by MSMEs, expand insurance coverage, and pay premium perks for frontline workers, among others. Similarly, the government can use funds related to social security, foreign employment welfare, constituency development, and prime minister employment scheme. It could also use funds lying idle at various autonomous authorities. These measures do not necessarily jeopardise fiscal sustainability.

Moreover, the government can request the Asian Development Bank and the World Bank—the largest multilateral lenders to Nepal—to repurpose existing assistance towards the government’s new immediate and medium-term priorities. It can also seek additional concessional loans, given the enormity of the crisis and the fiscal burden in the next few years. Multilateral lenders have rapid disbursement facilities for emergency assistance and policy-based loans for budget support to help the government’s agenda.

Finally, the government could issue a pandemic bond and request the central bank to purchase it under a special one-off mechanism. For instance, the central bank can repurchase government bonds from the market and return the funds to the government’s account when they are due. Or it can perpetually roll it over.

Friday, May 1, 2020

INR 111 trillion National Infrastructure Pipeline in India

Accroding to PIB, Task Force on National Infrastructure Pipeline (NIP) submitted its Final Report on NIP for FY 2019-25 to the Union Minister for Finance & Corporate Affairs Smt. Nirmala Sitharaman on 29 April 2020. FM Sitharaman had announced a five-year Rs. 100 lakh crore infrastructure investment in her budget speech 2019-20. NIP is aimed at improving project preparation, attracting investments (both domestic and foreign) into infrastructure. It is considered to be crucial for target of becoming a $5 trillion economy by FY2025. NIP was also featured in FY2021 budget.

The final report of NIP Task Force is projecting total infrastructure investment of Rs 111 lakh crore during the period FY 2020-25 in light of additional/amended data provided by Central Ministries/State Governments since the release of summary NIP Report. Out of the total expected capital expenditure of Rs. 111 lakh crore, projects worth Rs 44 lakh crore (40% of NIP) are under implementation, projects worth Rs 33 lakh crore (30%) are at conceptual stage and projects worth Rs 22 lakh crore (20%) are under development Information regarding project stage are unavailable for projects worth Rs 11 lakh crore (10%). 

Sectors such as energy (24%), roads (18%), urban (17%) and railways (12%) account for around 71% of the projected infrastructure investments in India. The Centre (39%) and States (40%) are expected to have almost equal share in implementing the NIP in India, followed by the private sector (21%).

The report identifies and highlights a set of reforms to scale up and propel infrastructure investments. It also suggests ways and means of financing the NIP through deepening corporate bond markets, including those of municipal bonds, setting up Development Financial Institutions for infrastructure sector, accelerating monetisation of infrastructure assets, land monetisation, etc.

The task force has recommended that three Committees to be setup: (i) Committee to monitor NIP progress and eliminate delays; (ii) a Steering Committee in each Infrastructure ministry level for following up implementation; and (iii) a Steering Committee in DEA for raising financial resources for the NIP. The NIP project database would be hosted on India Investment Grid (IIG).

For NIP, a bottom-up approach was adopted wherein all projects (greenfield or brownfield, under implementation or under conceptualisation) costing greater than Rs 100 crore per project were included.