New India – Vocal about local but aspirationally global

charkha modi

Prime Ministers Modi’s address on May 12 was, as expected, a dog’s breakfast of proposals aimed at pleasing everyone.

Please all stimulus 10.5% of GDP

The Rs 20 trillion ($260 billion) stimulus “package” – around 10.5% of the likely GDP of Rs 190 trillion in Fy 2021 – is touted as a silver bullet which would salve the hunger of the poor; put income in the hands of workers; support farmers; help the honest, middle-class tax payers and revive struggling MSMEs (micro, small and medium industry ).

Focus MSMEs

Even the largest MSME is exceedingly small with an investment ceiling of just $133,000. Not surprisingly, most are not competitive and live on government hand- outs. Like agriculture, which employs around 50% of the total workforce of 450 million, its political trump card is the large numbers it employs – 25% of the workforce albeit in poorly paid, low value addition jobs.

Self reliance not self centered

Self-reliance figured big in the speech. One might assume that self-reliance and global aspirations do no not gel. But for the PM self-reliance is about  compelling the world to rely on you without you relying on the world – a very Chinese model of growth which focuses on the “take” aspect of globalization but ignores the “give” quid pro quo.

Can this one-sided strategy work? It has in China. We could swing it too, if we become indispensable for the World. The real question is how? No answers yet on that one, except by becoming the biggest solar power and battery technology producer. One problem, the Chinese already have a head start over us.

Alphabet soup

Similarly, wooly are the five pillars of self-reliance (EISDD) – Economy, Infrastructure, Systems, Democracy and Demand. How infrastructure or demand can be distinct from economy is a mystery.

This bit of gobbledygook was possibly fed to the PM. He gamely ploughed through the speech. But whoever is responsible for the gaffe should be sacked before the next speech.

The Four Ls

Much more focused was the PMs characterization of the stimulus package as focusing on the five Ls – Land (real estate); Labor, Liquidity and Laws. PM Modi loves alliterations and his speech writers hit a winner here – so maybe a warning is enough.

FM Sitharaman – pushing money out of the door

Sitharaman

Finance Minister Sitharaman, accoutered appropriately with an elegant, locally made, cotton mask, addressed a press meet subsequently detailing the “revival package” – the first of “three or four”. She was, as always, to the point, measured but sadly a little stiff. Reporters were spaced out widely, per the “social distancing” norms and asked questions in a pre-determined order. The PIB moderator was overzealous in disallowing any questions not specifically related to the presentation including relevant ones like the likely fiscal deficit.

State Finance Minister Anurag Thakur surprised. He delivered the Hindi translation with unerring clarity and aplomb. He seems destined for rapid progress up the BJP ranks.

Part One of the FMs “package” was remarkably well formulated with an eye to optimizing the cost of “relief” whilst simultaneously pushing much needed reforms.

MSME revival package

A case in point is the package for small industry. Bang on, was the upward revision by 5X of the investment ceiling and doing away with the lower limits for service sector units, for qualifying as an MSME. This should dilute the existing, regressive incentive to remain small.

The differentiated liquidity measures with partial or full government guarantee without collateral, inspire confidence. These target well-run, low risk units and financially stressed ones. In addition, a growth fund, leveraged by bank finance, will help units, which are small today but aspire to be the Flipkart of tomorrow.

The total allocation for these measures is a whopping Rs 3.3 trillion or one third of the outstanding credit of Rs 11 trillion to SMSEs. Also, all receivables from government or publicly owned enterprises, are to be cleared within 45 days.

An unrelated but significant proposal, to reduce stress in the construction sector, is to allow an across-the-board extension of up to six months for the completion of projects and contracts affected by the lock down and release bank guarantees to the extent of work completed to enhance liquidity with developers.

Also, real estate developers get relief via automatic extension by six months of completion dates beyond March 31, 2020 with Real Estate Regulation Authorities authorized to allow an additional three months. Nitin Gadkari Minister for Transportation and MSMEs clearly knows his onions.

These progressive measures come with one regressive inclusion which is plainly “pork”. Global tendering of government purchases worth up to Rs 200 crores will no longer be necessary thereby enlarging the shield protecting MSMEs from competition.

Small gains for the salaried middle class

Relief for the middle class comes from the government paying their Provident Fund (PF) contributions @12% and the matching contribution by employers for six months from March till August 2020. The Rs 25 billion will benefits 0.4 million establishments and 7.2 million employees earning up to Rs 0.18 million per year.

For government officials the PF contribution stands reduced to 10% from 12% with government continuing to pay its share of 12%. The allocation of Rs 67.5 billion will benefit 45 million employees.

More help for distressed NBFCs

Following up on the recent provisions introduced by the Reserve Bank of India for enhanced credit for Non-Banking Finance Companies, Housing Finance Companies and Micro Finance Institutions, the government will guarantee up to Rs 33 billion of debt with an investment grade rating.

For non-rated and below investment grade deb government will underwrite the initial 20% of loss for each entity aggregating to a total of Rs 45 billion. NBFC assets are around Rs 30 trillion and NPAs are expected to be in the low teens so these provisions are small beer. But they are in the right direction.

Improving power utility finances

An intriguing inclusion is that publicly owned Power Finance Corporation and Rural Engineering Corporation shall lend Rs 0.9 trillion to state owned Distribution Utilities against the respective state government guarantees, for liquidating their receivables to CPSUs. A clever hook is a promised rebate in the cost of power supplied by CPSUs, if DISCOMs pass on a part of the benefit to retail customers.

This is the fourth such “one-time debt restructuring” of DISCOMs – the earlier ones were in 2001, 2010 and 2017. But it is aligned with the legislative changes proposed in the Electricity Amendment Bill 2020 relating to fundamental, never-tried-before, performance enhancing, regulatory innovations.

Other inclusions are promises to speed up Tax refunds, extend tax payment and assessment cut-off dates and to extend the V2V (Vivaad Se Vishwas) scheme till December 2020 to increase inflows in exchange for waiving the penalty charges on disputed tax amounts.

Part one of the “three or four” part serial-show starring FM Sitharaman was high on efficiency enhancing process tweaks at no fiscal cost. Fiscal outlays amount to Rs 5 trillion for government and Rs 0.9 for PFC/REC. This was just the trailer with 70% of the “package” reserved for future shows. Enjoy.

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