Government offers new Rs.6.28 lakh crore pandemic package (June 2021)

On 28th June, one more credit push worth Rs.1.5 lakh was announced by India's finance minister Nirmala Sitharaman.

 Government offers new Rs.6.28 lakh crore pandemic package (June 2021)

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• The story: On 28th June, one more credit push worth Rs.1.5 lakh was announced by India's finance minister Nirmala Sitharaman. It includes additional credit for small businesses, more funds for the healthcare sector, loans to tourism agencies and guides, and waiver of visa fees as part of a credit-led package to support the pandemic-hit economy.
• The claim: The minister claimed it was an effort to stimulate growth, exports and employment as well as to provide relief to COVID-affected sectors. An expansion of the existing Emergency Credit Line Guarantee Scheme (ECLGS) by Rs.1.5 lakh crore was also done. A new Rs.7,500 crore scheme to guarantee loans upto Rs.1.25 lakh to small borrowers through micro-finance institutions is brought in. Other measures include -

1. a fresh loan guarantee facility Rs.1.1 lakh crore for healthcare investments in non-metropolitan areas and sectors such as tourism
2. a separate Rs.23,220 crore allocated for public health with a focus on paediatric care, to be utilised for increasing ICU beds, oxygen supply and augmenting medical care professionals for the short term by recruiting final year students and interns
3. Indirect support for exports worth Rs.1.21 lakh crore over the next five years, free one-month visas for five lakh tourists, new seed varieties for farmers and additional outlays over the next two years to expand broadband to all Gram Panchayats, were also included in the package
4. The existing support to push employment, where the government bears EPF contributions for new employees earning less than Rs.15,000 a month for two years, has been extended till March 31, 2022
5. So in all, there are three 'direct stimulus' initiatives so far — (i) providing free foodgrains, (ii) incremental health projects’ spending, and (iii) rural connectivity. These will be worth Rs.1,18,390 crore (about 0.5% of estimated GDP for 2021-22). This rather limited stimulus may be followed up with another shot a few months down the line.

• Four sectors: The announcement stresses upon four sectors - health, tourism, MFIs and agriculture. Other measures announced fine-tune the scope of the already existing arrangements. Most of the latest announcements are part/extension of the past packages, but this may be a timely relief to the sectors/segments that were impacted most by the second wave of the pandemic.

1. The Rs 50,000-crore guarantee cover package to boost the medical infrastructure in underserved areas across the 124 aspirational districts, can lead to the overall improvement in human development.
2. At present, as per MSME website, 124 districts are recognised as aspirational districts. Maximum loan size under the scheme is kept at Rs 100 crore with interest rate cap of 7.95 per cent and guarantee duration of three years.

• Total load: The total impact amount seems huge at Rs.6.29 lakh crore, but a big part of it is by way of credit guarantee schemes with no immediate outflow. So impact on the fiscal deficit will be limited while the stock markets could give a positive reaction. Technically, the fiscal impact of this package, and earlier, is not linear as a substantial part of the package is contingent liabilities.

1. The package is made up of government guarantees to banks and microfinance institutions for loans they extend to the pandemic-hit sectors
2. It totals up to Rs 6.28 lakh crore together with the previous such packages
3. Assuming equal distribution of the new announcement of Rs 1.10 lakh crore, with 50 per cent and 75 per cent guarantee cover and a risk weight of 100 per cent, banks may have a capital relief of around Rs 7,500 crore that can further generate credit of around Rs 70,000 crore

• PLIS relief: Separately, large electronics manufacturers under the Production-Linked Incentive scheme (PLIS) have been granted an additional year to meet their production targets as many struggled to sustain or scale up operations due to the second COVID-19 wave.
• Summary: The government may consider giving more of a direct stimulus, rather than credit lines, as only that can push quicker economic recovery.

 

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