Is the Stimulus strong enough to take us to self-reliant India?

The economic reforms and packages announced recently by the Govt of india in the outbreak of covid-19 were highly leveraged on Liquidity among the four stated focus areas. Keeping aside the policy changes or changes in Law driving ease of doing business, inviting private participation, and relaxing compliance deadlines, ~77% of the financial packages totaling to ~Rs 21 Lakh crore was directed to improve liquidity while Land or Infrastructure and Labour were given a share of  ~12% and ~11% respectively. The table below indicates the major items by each of the buckets…

While the share of Labour (except for the equity infusion in strategic MSMEs of Rs 50000 Crs) will provide immediate benefits and are meant for sustenance, investment in Infrastructure in Farm and Construction will see the benefits yielding over time and measures on Liquidity depends on the appetite of the business enterprises to borrow at a cost and the willingness or the ability of the lending vehicles to extend support quickly but efficiently.

Liquidity, the largest shareholder:

The announcements did clearly spell out the intent of making Liquidity available and easing its flow at least partially, for MSMEs who are existing borrowers and for NBFC papers both of which are guaranteed by the Government on their credit risks. It does leave out a significant section of MSME, though, who are not existing borrowers in formal and informal segments and it makes a big assumption that the existing borrowers will have the appetite to borrow more, that too at a cost.

Lets look at the ground realities of the business enterprises, once again, since the Covid-19 outbreak in India and lockdowns were announced.

• Enterprises dealing with goods or services saw a quantum shrinkage in demand and in many cases supply situations were constrained by the unavailability of labour and broken supply chains
• Collections were delayed, Inventories piled up,  leading to higher working capital needs despite payables were kept on hold wherever possible
• Certain variable expenses could be avoided but Fixed expenses like salaries, rents etc were still incurred while revenues shrunk leading to losses and negative cash flows during the period.

These ground realities have hit all business enterprises whether big or small. The big in certain sectors may still sustain and survive but the micro, small and medium in both farm and non- farm sectors do not have the deep pockets to absorb an impact of this magnitude. The fixed expenses leading to negative cash flows during this period is a huge burden for the smaller businesses and they would be reluctant to increase their commitment on fixed expenses any further, in the uncertain future. The Liquidity flow to these businesses will have a fixed cost in terms of interest and that will be a deterrent for small businesses to avail it. There have been many attempts in the past by the Govts, supported by the lending vehicles, to provide Liquidity to the small businesses. Even the lending schemes that were offered with credit risk guarantee by the Govt in the past, had not seen much success. The reason is the same. The small businesses till they reach a size, are not capable or willing to commit to scheduled repayments and interests. They would rather go to the local money lenders at a much higher cost who offer them flexibility in repayments. The article on Delivery Challenge on Economic Package at https://www.livemint.com/politics/policy/the-delivery-challenge-in-the-government-s-msme-package-11589889800834.html  further elucidates on the subject.

Moreover, loans are definitely not an answer to the losses that the businesses are incurring during this period. Funding losses with working capital loans, even with moratorium on repayments, is a bad design. These debts, if disbursed, will eventually turn bad invoking Govt guarantees or soon be classified as non-performing assets.  Loss of business leading to accumulated losses in the Balance Sheet needs long term cash injection and are typically done through Equity. While large business enterprises may still have a way out to seek long term capital infusion, what options do the small and medium have? Lets not forget that the small and medium enterprises, besides employing significant section of the workforce, contributing 30% of India’s GDP , also help in de-concentration of wealth and support the essential linkages in various supply chains of goods or services. They are an important segment of the society and their revival is critical for the economy.

Another question looms large. Was Liquidity a crisis in the Banking system before Covid? The Banks were parking substantial amount of funds with the RBI under the reverse repo mechanism.  The interest rates both on deposits and lending never suggested that Liquidity was an issue. As businesses ran into a slippery slope during lockdowns, funding for Fixed Expenses and additional working capital requirements became the highlight across sectors and business uncertainties prompted Banks to turn off the taps of additional credit. Now, the interventions by RBI and the GOI will mandate the same Banking system to reopen those taps and make Liquidity flow to the business despite the uncertainties which have worsened with every passing day. How is it going to help? A part of the loans that are guaranteed, if they cascade to the business, may generate adequate cash flows over time to repay OR may end up being non- performing assets which may either invoke the Guarantee or hit the Banking system. While funding for additional working capital may still have some merits, funding for losses are likely to end up in non- performing assets.  Its debatable whether routing these loans through the Banking system and ending up in Govt books through write offs is a better option compared to cash handouts based on certain criterion, at least for the losses suffered during this period. The honest business entrepreneurs who would be skeptical on loans may actually lose out while others may happily ride on Govt Guarantees and the ones without any existing borrowings will have to figure it out all by themselves as there is no additional support available. Now you may question…. (a) whether, this truly is an intended stimulus?  (b) How is it going to help? Even the worst hit industries, like Travel & Hospitality, transport, Aviation etc did not find a separate mention in the package.

Infrastructure – a small shareholder

The additional investments in Infrastructure have been proposed in Farm and Construction sectors. While Construction is proposed to be fuelled by higher demand of real estate through the extension of credit- link subsidy scheme for a section of the home loan borrowers, Farm is likely to see some direct investments in much needed areas. The question here is … Is it enough?

Lets take Farm and Rural India. We are all aware of the exodus of rural population to the urban cities in search of jobs over the last few decades. Many of these migrants belong to families engaged in Agriculture in their native rural and they support their families especially during the off seasons for crops. During Covid, many migrants have gone back to the natives. The package did announce inclusion of migrants within the ambit of MGNREGA to take care of their immediate livelihood needs. If there is dearth of jobs, as all outlooks reveal, how is it a long term solution? The assumption may be that this workforce will return to their erstwhile places of work soon … and if they don’t or if there is not enough jobs in the cities?

Wasn’t this the time, to visualize Rural India differently? Rural India is where our farmers live. They produce food for the citizens of the country. We have all realized, how essential food supply is, during the period of Covid. And yet, the people who till the soil and give us food, are left open to a world of uncertainties, the risks which they don’t fathom but hit them hard when those risks strike. There have been lots of initiatives by Govts and Private sector both in profit and non-profit space in the past to improve the lives of our farmers. They have transformed supply chains in certain cases and there are continuing efforts, including in the recent economic packages, to provide Farmers with options to realize a better price for their produce, to insure them on failed produce etc. But are they really making a material economic difference to their lives? If they were, why would Rural population migrate to cities for jobs, why do we have to bring them under MGNREGA and support disguised unemployment and why don’t we see them demanding goods or services that have remained only the privileges of the urban? A self – reliant India needed a paradigm shift in the Rural Economy. Shouldn’t we have signed up on the vision to make Rural India prosperous and design a roadmap for it? A significant share of the work force have moved backto rural India, they are hungry for work, and they are survivors….”Necessity is the mother of Invention”.  They may need thought leadership, right infrastructure and guidance to make their lives better. All good work happening in pockets could be brought together, synergized, replicated and implemented with additional stimulus and impetus to make Rural India self – reliant. Are we missing that opportunity? A transformation needs a big heart and good intelligence to understand the nuances. Looking at the Economic Packages announced over five days from 13^th to 17^th May 2020, I guess, the nuances were missed out and the packages on Liquidity and Infrastructure are likely to leave a big gap between the promise of self – reliance and its delivery.

About the author:

Susanto Banerjee is a Change Catalyst who  

• has served Corporates in Paints/ IT/ Pharma industries for ~ 27 years in various leadership roles including CFO and CHRO
• is an independent consultant in Financial and Business Transformation space
• is the Founder of Ventures, a theatre based activity platform for Behavioral Coaching and pure play theatre where he coaches, directs and acts
• is associated with non profit sector driving social impact.