• Aditya Natani

India’s stimulus – An imbalance between short-term urgency and long-term reforms

Updated: May 21



Part – I: PMGKVY, RBI and MSME measures


The Prime Minister is a master sloganeer says Ashok V Desai, former chief economist for the country. On the 20th minute of the 20th hour of 12th May, PM Modi announced a so called ’20 lakh crore’ package. This is not a mere coincidence but planned well in advance exhibiting the priorities of focus by the PMO. What government should have done was to announce a ‘real package’ within the first 20 days post the lockdown but unfortunately the government took nearly 50 days to announce a ‘poorer remodelled version’ of poorly drafted policies already in place. A mere announcement of a figure which the Finance Minister had to lay in detail in days to come sounded absurd. It seemed like the PM wanted to take all the credit for the idea. The scale of mathematical jugglery used by FM has led me to write more than one or two posts to sum-up the so called stimulus package announced during the whole week. This is the first part mainly focusing on PMGKVY, RBI monetary measures, measures for MSMEs and other measures.


Make in India vs Making India Aatmanirbhar


If one would ask what the focus of the Prime Minister’s speech was, it was ‘Making India Self Reliant’ or ‘Aatmanirbhar’ in Hindi. It sounds like a campaign ‘Make in India’ announced by the PM on 25th September 2014 when his government came in power with robust majority. The campaign’s focus areas were

  • to increase manufacturing sector’s growth rate to 12-14% p.a.,

  • create additional 100 million additional manufacturing jobs by 2022 and

  • ensure manufacturing sector’s contribution to GDP to 25% by 2022 (later revised to 2025).


The objectives seem modest and achievable in comparison to unimaginably ambition of $5 trillion economy by 2024. We will see how the government failed to even accomplish those modest goals let alone overambitious goals.



First, the GDP growth rate from 2014 to 2015 saw an increase by more than 50 basis points from 7.41% to 8.00%. However, 2016 recorded only a mere increase of 26 basis points to 8.26% and has been in free fall since 2016. According to former CEA Arvind Subramaniam GDP is overstated by approximately 2.5% since 2015 when BJP tilted the scales for calculating GDP in its favour and changed the base year from 04-05 to 11-12. Demonetization broke the India’s industrial growth spine and the result is evident from the plunge in GDP growth rate since 2016.




Second, as per world bank data total workforce of India in 2014 stood at 472 million which reached to 494 million by the end of 2019, an increment by 22 million. Also, the share of workforce of industrial sector has remained almost same since 2012 till 2019 at an average of 24.50%. Therefore, it means that out the total new jobs created since 2014 only 5.4 million new jobs have been created in the industrial sector. Please note that the industry sector category includes mining, electricity and other similar activities. So, give and take Modi government has been able to generate approximately only additional 4 million jobs in last 6 years as compared to government’s target of 100 million manufacturing jobs by 2022. How government will be able to generate additional 95 million jobs in next 2 years especially in the post pandemic era which has impacted the Indian industries severely?


Third, as per the data Sectoral GVA data from 2014 till 2019, government policies have zero impact on the contribution of manufacturing sector to total GVA added since 2014. The share of manufacturing sector has remained constant between 16.1% to 16.9% which shows government has failed considerably in achieving even the 3rd goal of ‘Make in India’ campaign. The growth which has remained constant in the last 5 years is not expected to shoot up magically in the next 5 years as the country has to tackle already slowed down economy further shattered because of pandemic.

Source: Compiled from Ministry of Statistics and Programme Implementation


Therefore, the data proves that the government failed to achieve all the three main objectives of ‘Make in India’ let alone attract foreign investments. The ‘Aatmanirbhar Bharat’ is just a new cover to the old notebook of ‘Make in India’ and lack of government’s follow up on its own policies convert them into ‘jumlas - slogans’.

Stimulus Package Announcements Analysis – Part I (focused on PMGKVY, RBI monetary measures, MSME measures and other financial measures)


The 20-lakh crore support package involve a very small amount of direct government spending and as said by Biocon chairman Kiran Mazumdar Shaw that the program may not help stimulate demand. PM’s announcement of making India Aatma Nirbhar raised the bar of expectations and people thought that major reforms are on their way to boost the economy, alas the FM punctured expectations of all those industries, migrant labourers, farmers and middle to lower class families with her announcements in last 5 days.

Pradhan Mantri Garib Kalyan Vikas Yojana: Government has announced insurance cover to health workers on the front lines, cash distribution to women, poor senior citizens, widows and divyang (specially abled), free ration for from March to May for those registered under National Food Security Act, increase in MGNREGA wages from Rs 182 to Rs 202 per day, etc. The announcements made did not sound like NEW fiscal measures but modification of existing policies which were launched and soon forgotten. First, the cash distribution system of Rs 500/- per month to women Jan Dhan account holders and Rs 1000/- to other class of persons sounds meagre to survive on. Also, no mention of class of persons other than women, senior citizens and specially abled as government believes that men of the society still have source of income alive in lockdown! Second, as per report of Niti Aayog 32% beneficiaries under the above-mentioned act are from urban areas. The scheme does not cover people who are not registered under the act and where transient poverty will rise under lockdown. Third, the increase of MGNREGA wages is a good step. Although the PM has been criticising the scheme since 2014, it is now helping government to save the face. Has the government thought of how MGNREGA will absorb those migrant labourers who are moving to their villages and may remain there for next 4-5 months? I guess not. As per latest report by NDTV, private teachers in urban areas which were forced to return to villages are now getting enrolled under MGNREGA! Fourth, Building and Construction Workers Welfare Fund allowed to be used to provide relief to workers and District Mineral Fund (DMF) to be used for supplementing and augmenting facilities of medical testing, screening etc. If so, what was the welfare fund doing till now and what have minerals to do with medicines? Fifth, allowing employees to withdraw from their own EPF accounts seems like government is showing mercy to people on withdrawing their own savings! Since when people’s own money became part of government’s stimulus package?

RBI Monetary Measures: First of all, introducing monetary measures taken up by the RBI as a part of stimulus package of the government looks desperate effort to sweep all the laurels possible. Like every other central bank of the world, RBI is trying to inject liquidity in economy to boost up the consumption, but no government as counted those measures as part of their stimulus packages except India. One must remember as the history suggests a central bank is an autonomous body which has been kept apart from the rest of the government precisely in order to apply the brakes when politicians went too far and therefore RBI’s monetary measures should not be counted as one announced by the government. However, government doesn’t tell you the differences between the announcements and their ground realities. RBI has announced a host of measures to pump liquidity into the economy, let’s see them one by one.

  • First, is auction of Targeted Long-Term Repo Operations (TLTROs) of Rs 1 lakh crore of for injecting funds to investment grade corporates and TLTRO 2.0 for injecting funds into investment grade NBFCs and Micro-Finance Institutions. TLTRO auctions worth Rs 1 lakh crore total bids of Rs 3.35 lakh crore an oversubscription rate of more than 300%. Whereas, TLTRO 2.0 first auction was held on 23rd April and received bids only worth Rs 12850 crore as against 25k crore. TLTRO for corporates received overwhelming response whereas TLTRO 2.0 for NBFCs failed miserably. Banks grabbed the opportunity for their corporate lenders swapping their expensive debt with cheaper debts but left the NBFCs to hang dry in such dire times. According to Bloomberg major beneficiaries of RBI’s TLTRO of 1 lakh crore for corporates are Reliance Industries, Larson & Toubro, Tata Steel, and Mahindra & Mahindra. In absence of credit guarantee from the government bankers’ response will remain tepid towards NBFCs and MFIs aggravating their liquidity crises. In the name of liquidity injections government favoured its big corporate friends leaving struggling MSMEs behind.

  • Second, reduction in Cash Reserve Ratio (CRR) from 4% to 3% till March 26, 2021 and easing of Marginal Standing Facility (MFS) from 2% to 3% till June 30, 2020 leaving banks with additional liquidity of Rs 2.74 lakh crore clubbed together. CRR is a specified minimum fraction of the total deposits of customers, which commercial banks have to hold as reserves either in cash or as deposits with RBI whereas under MFS bank can borrow overnight Loans from RBI at their own discretion. FM boasting these measures is foolishness because from 15th March till 13th May banks have already parked funds of Rs 5.47 lakh crore with RBI suggesting that the RBI’s efforts to inject money into the financial system is failing badly. The graph below depicts how banks’ deposits with RBI has been increasing since 2018. Another graph shows that lower rated corporate bonds are not attractingnew buyers as banks and NBFCs are wary of any further defaults.



  • Third, measures such as Moratorium on Term Loans, Deferment of Interest on Working Capital Facilities, Easing of Working Capital Financing, etc. are just policy provisions and not actual outlay, hence should not be announced as part of stimulus package.

The only scheme which may infuse capital into the money market is refinance window of 50k crore to NABARD, SIDBI and NHB. As said by former World Bank chief economist Kaushik Basu, “If you keep knocking on the door of the central bank for every fiscal problem, you’re going to weaken the savings and investment rate.”

Source: The Economic Times


Theoretically such excess liquidity with banks should reach the consumer market to boost up the demand, instead bankers are depositing the excess liquid funds with the central bank at reverse repo of 3.75pc. This means that bankers are willing to bear losses of 65 basis points by lending money back to RBI but doesn’t want to contribute more to its bad loans portfolio which already has been spiralling out of control before covid19.

Relief package to businesses including MSMEs: In these dire times when governments all over the world are offering businesses to cover at least 3 to 6 months of wages and other recurring and fixed expenses necessary for their survival, the FM of India gave a paltry assistance all in the form of credit instead of capital infusion. Government aims to provide funding of Rs 3 lakh crore upto 20% of their existing loans to cover up their expenses backed with sovereign guarantee, Rs 20k crore for stressed MSMEs backed mostly with CGTMSE and Rs 50k crore through ‘Funds of Funds’ in which government will put in seed capital of Rs 10k crore and invite Rs 40k crore from professional corporations and venture capitalists. There are major flaws in the announcements which have been left unaddressed by the FM. First, the scheme provides 20% emergency credit line of entire outstanding credit as on 29th Feb. The words used are ‘outstanding credits’ and not ‘sanctioned limits’. What will happen to those seasonal businesses like rabi crop based agri businesses who might not have utilised even half of their sanctioned limits at February end? Second, the scheme covers only those who existing loans with banks. What will happen to those small businesses who didn’t have any limits with bank but might need assistance now? Third, no benefit for the wholesale and retail traders who are the heart of supply chain as they are not categorised as MSME under MSME Act. The Retailers Association of India (RAI) which comprises of more than 13k organised retailers has requested government to include small retailers into the scheme. Fourth, the credit line is collateral free and shall have sovereign guarantee. There is already a scheme called ‘Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) and banks show little interest in the scheme due to complications while claiming guarantee if the loan gets bad. Fifth, under scheme of credit to stressed MSMEs and other businesses through ‘Funds of Funds’ government is basically encouraging promoters to infuse capital by taking debt termed as venture capital. It is still not clear how a MSME be evaluated as stressed since many MSMEs are on the verge of becoming stressed accounts due to demand destruction post covid19.


Government has also decided to disallow global bids in government tenders up to Rs 200 crores. However, unless there are further clarifications to this announcement it is uncertain how it will impact the MSMEs.


In addition to above announcements, government also made a much needed and awaited enhancement in investment limit for defining MSMEs, however the amendment in definition is also flawed because it increased the investment benchmarks and introduced additional benchmark of turnover levels which are set quite low. Many MSMEs have opposed to the amendment as there are a large number of MSMEs whose investment in plant & machinery might be less than 20 crores but turnover levels are easily more than 100 crores. Once they breach the turnover limit of 100 crores they will not be fall in ambit of MSME Act and a MSME unit enjoys host of fiscal and other protective benefits provided by the government to shield their interests from hostile large-scale corporations. There is no official data of MSME units categorisation based on their turnover, but it is apparent that there are many MSME units who may be a small or medium-scale unit by the benchmark of plant & machinery investment but may fall out of the ambit of MSME Act by the turnover benchmark.


The only announcement that may actually help MSMEs indirectly is liquidity flow of Rs 30k crore to investment grade NBFCs and partial credit guarantees to low rated NBFCs worth Rs 45k as many NBFCs have large exposures to MSME sector as per table above.


Although, government is contemplating collateral free extended credit line, MSMEs are wary of fresh loans because they are unsure of demand for their products and feel that they may default on even additional loans if demand does not pick up soon. Anil Bhardwaj, Secretary General of Federation of Indian Micro and Small & Medium Enterprises (FISME) feels that the benefits announced will benefit only 3-5% of total MSMEs. A direct benefit transfer is what MSMEs were expecting to stay afloat, not another loan.


In all it seems that FM used all the mathematical and grammatical jugglery in her basket to make sure that the stimulus sounds promising which in fact is incompetent to get MSMEs back on their feet.

Monetary Measures that should not form part of stimulus in the first place: There are a host of announcements made part of the so-called stimulus, which instead are temporary liquidity measures. There are even some instances where the money that already belongs to people are window dressed as stimulus such as remitting pending income tax refunds of up to 5 lakh and pending refund and drawback claims to exporters. Reducing the rate of TDS is not reduction in tax but a liquidity measure letting people to keep that 25% in their hands till they file their income tax returns and pay the total tax. Reduction of PF rate from 12% to 10% is a liquidity measure at the cost of employees’ benefits. It would be a foolish to include measures such as extension of income tax return filings, extension of GST return filings, allowing extension of mandatory board meetings, allowing EGMs through video conferences, etc. in a stimulus package, alas our FM did it.


We all agree that Indian economy needs major overhauling reforms for robust growth of the economy in medium to long term especially after demonetisation blunder, but government needs to understand the urgent requirement of direct benefit transfers to small businesses, migrant labourers, farmers and similar underprivileged class of people by monetising some part of the fiscal stimulus and fiscal incentives to all businesses registered under MSMEs and GST acts. Reduce the tax rates temporarily to reduce hardships, relax some of the compliances not for just 3 months but for at least a year or so till the economy recovers. Its high time the government instead of burdening small-scale businesses with increased debt, provide fiscal incentives some conditional and some unconditional to boost the demand and consumption.


#pmgvky #stimulus #indiastimulus #monetarymeasures #msme #stressedmsme #rbi #nirmalasitharaman #fm #econmicstimulus #aatmanirbharbharat #aatmanirbhar #makeinindia #migrantlabour #TLTRO #CRR #MFS #NBFC


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