Economy

An empty package

Print edition : June 05, 2020

Finance Minister Nirmala Sitharaman at the first of a series of press conferences, on May 13, Photo: Kamal Kishore/PTI

Connaught Place , New Delhi’s central business district, which usually bustles with activity, wears a deserted look. Photograph of May 14. Photo: Prashanth Vishwanathan/Bloomberg

The Modi regime, which has been unable to control the COVID-19 infection, restore economic activity and provide relief to millions exposed to starvation, trains its sights on Indian democracy, making use of the panic generated by fear and a lockdown that forecloses paths of resistance.

The Narendra Modi government has managed to turn a health emergency into independent India’s biggest humanitarian disaster. What started as a threat from COVID-19 has become a multidimensional crisis. Economic activity has collapsed, resulting in waves of job and income losses. The ongoing phase of the lockdown—chaotic in every possible way because of the bureaucratic definition of zones, restrictions, regular revisions of guidelines arising from the Home Ministry’s tight grip on when and how even a screw will turn in the country—is unlikely to end well. Ironically, the lockdown is likely to be lifted at a time when the caseload is rising, and the economy’s prospects look dim.

The Modi regime’s penchant for the theatrical flourish was on display when the Prime Minister announced that a Rs.20 lakh crore “economic package” was on its way. Like many of his speeches, this one too had a buzzword: he said his vision was to make India Aatmanirbhar—translated officially into English rather inaccurately as “self-reliant” but more accurately and ominously as taking charge of one’s own destiny. True to form, Finance Minister Nirmala Sitharaman, whose gruelling marathon Budget speech of February is still fresh in memory, started unveiling the package on May 13 and continued to do so in a series of press conferences over five days. What the Minister delivered turned out to be not just a damp squib but a gigantic exercise in subterfuge. She managed to conjure up a package that beat even what the Prime Minister had promised—a total package amounting to Rs.20.97 lakh crore. But the large package turned out to be empty.

The elaborate ruse had several key elements. First, the trickery consisted of adding up all that the Reserve Bank of India (RBI) had already announced as liquidity-enhancing measures, which, incidentally, had failed miserably. Second, the Finance Minister included elements of expenditure that had already been announced, much before the emergence of the COVID threat. Third, she added expenditures that were to be spread over several years by making them appear as if they were to be spent on a here-and-now basis. Fourth, she made several policy announcements aimed at attracting private investment as if they would spur economic activity during the ongoing crisis. Fifth, she made new forays into territory unchartered in the history of Indian federalism by tightening the fiscal noose at a time of severe and unprecedented stress. Sixth, by leaving some things unsaid and by leaving some of the fine print to the Union Cabinet to spell out a full week later, she effectively misled the large home-bound audience glued to the TV into thinking that the package was bigger and more consequential than what was actually on offer.

The common consensus among not just professional economists but among investment banks and brokerages is that the effective impact of the “expenditures” amount to not more than 1 per cent of India’s GDP, a far cry from Modi’s promise of 10 per cent. Economists across the world, of widely differing persuasions, mostly agree that a fiscal expansion, led by state-driven expenditure, is singularly important in the context of the pandemic-driven simultaneous collapse of both supply and demand. However, the response in many countries, in the United Kingdom, the United States and in the Eurozone area for instance, has been to adopt the liquidity infusion route to recovery, while giving significant scope for fiscal policy support. While these countries have recognised that a sudden collapse of markets has imposed a short-term crisis of liquidity across firms and households, that is not by itself enough to spark a recovery from the recession. Thus, the choice between a liquidity-driven solution and the fiscal route is not only artificial but irresponsible at a time of a grave crisis. The point is that in both routes, because the markets have collapsed, the state has to take the lead and intervene effectively by putting its money where its mouth is.

On May 22, RBI Governor Shaktikanta Das made the first official announcement of an expected decline in the national gross domestic product (GDP) during the current year, although he refrained from mentioning any magnitudes. He also announced a further reduction in the repo rate—the floor rate in the lending rate in the economy—to 4 per cent, a move that is unlikely to motivate investment. Moratoriums on loans have been extended for a further three months, although that may receive the same tepid response from borrowers that the earlier one elicited. This is because the moratorium only postpones rather than resolves their repayment problems, imposing a higher burden at a later point in time.

Nirmala Sitharaman’s failure to establish the task force that Modi promised in his first speech in March means that she could proceed on whatever path she chose in the absence of an assessment. It is now amply clear that supply chains and productive capacity have been severely broken. The arbitrary and illogical division of colour-coded zones, without attention to the nuances of either geography or demography or the niceties of political conduct in a federal system, has only aggravated matters. The move clearly bears the imprint of Home Minister Amit Shah.

Soon after Nirmala Sitharaman’s announcements, the managing director of a small company in Bengaluru specialising in the manufacture of machine tools told Frontline that the three main “axes” of demand for his company’s products—Chennai and manufacturing units around the city, Pune-Kolhapur and the Gurgaon-Manesar belt—account for 75 per cent of the demand for his products and services. “The three axes are operating only at about 7-10 per cent of their capacity,” he said. His company, he said, could scale up operations from the current level of about 25 per cent. “But what is the point in my operating at full tilt when my clients are shut?” He also pointed out that the relatively larger units within what counts as “small scale” in India— units employing between 50 and 100 workers—“are now in mortal fear”.

The proprietor of a small industrial establishment in Peenya industrial estate in Bengaluru employing about 30 workers told Frontline that MSMEs (micro, small and medium enterprises) are so precariously placed that they have to borrow even to pay their goods and services tax (GST). Invoices for supplies made to larger companies are not paid within a reasonable time, while the MSME is responsible for paying the tax that it is supposed to have collected from its clients. The bigger companies delay not only payment for supplies received but also payment of tax, so the MSME suffers a double blow. Narrating his own experience, the proprietor said: “I have borrowed Rs.25 lakh from a public sector bank to pay GST. The bank knows this is strictly not allowed, but it also realises my predicament.”

The crisis in the MSME sector, a vital cog in India’s industrial capacity, means that the production chain is broken for two fundamental reasons. First, MSMEs are simply collapsing because they are not able to deal with cash flow problems, particularly those arising from working capital constraints. Second, lockdown-induced conditions have greatly amplified this crisis by threatening to turn them insolvent. Not only are markets shut, but the chaotic conditions relating to the relaxation of the lockdown mean that companies are operating under conditions of near zero visibility in which it is difficult for them to assess potential demand for their products. Their ability to predict market conditions is impaired by the fact that links in the production chain are broken and it is virtually impossible to assess demand. It is not for nothing that Rajiv Bajaj, CEO and MD of Bajaj Auto, asks how he can possibly start production before dealerships are open. If that is the fate of a company at the top of the tiers in the production chain, it is not difficult to imagine the situation of much smaller firms down the line.

The large companies’ failure to pay bills in time has been a perennial problem for small units in India. Despite legislation that sets a limit of 45 days, small units are wary of invoking legal clauses to claim what is justifiably theirs. “A small-scale unit that is operating in an industrial cluster does not have many customers, which affects its ability to stand up to the larger company when it is not paid its dues,” says the industrialist cited earlier. “The proprietor has to choose between exiting the business altogether or just somehow battling on,” he said.

Nirmala Sitharaman made much of the announcement that all public sector units (PSUs) and Central government departments had been asked to clear their dues to companies. However, small industry associations have pointed out that private companies, especially large ones, account for multiples of what PSUs and government departments owe to the small companies. Obviously, the Finance Minister does not enjoy enough leverage with large private companies to ensure timely payment.

Devil in the detail

The centrepiece of Nirmala Sitharaman’s package was the promise of Rs.3 lakh crore as loans to MSMEs by banks, which would be backed by a government guarantee. Companies with outstanding loans of up to Rs.25 crore and with an annual turnover of Rs100 crore would be eligible. The gleeful reception that this might have got was however dampened by the fine print that followed. First, the loan limit was also “clarified” (after the Cabinet meeting of May 20, which approved the package) to mean dues pending for up to 60 days prior to February 29, 2020.

That date is significant because it shockingly and explicitly rules out relief for companies that have been hit by the COVID-19-induced lockdown. There is zero relief to companies that have suffered in the more than two months of lockdown. Thus, companies that may have had to continue paying wages, maintain inventories, suffer delayed payments and incur overheads during the lockdown are left high and dry. Moreover, the loans will not be directly guaranteed by the government but by a scheme run by the National Credit Guarantee Trustee Company Limited (NCGTC).

After the Cabinet approval came, it became clear that the entire amount of Rs.3 lakh crore was not meant for MSMEs alone and would also include non-banking finance companies (NBFCs). While qualifying MSMEs can access these loans at the rate of 9.25 per cent, banks would charge interest at the rate of 14 per cent to NBFCs. Only time will tell if this differential will make it more attractive for banks to lend to NBFCs rather than MSMEs. The principal amount will enjoy a moratorium of one year while the loans will have a four-year tenure. But there are several reasons why the plan may not take off, at least in the desired direction. Banks, as is well known, have been averse to lending anything to anyone but their prime borrowers. This is despite the fact that the levels of non-performing assets (NPAs) of MSME borrowers are far smaller than those of large corporate borrowers.

Bankers have said that a letter of “comfort” from the government may have helped. One bank manager told Frontline that a loan guarantee does not mean banks do not have to undertake due diligence or explain to the guarantor if and when the borrower defaults. The Finance Ministry’s commitment to the scheme is only Rs.41,600 crore, that too spread over four years. However, banks would need to make provisions in their balance sheets taking into account the risk weight of 20 per cent; significantly, these provisions directly draw down profits in their balance sheets.

The conditions attached to the Cabinet’s final approval for another scheme—of loans worth Rs.30,000 crore for NBFCs and housing finance companies announced by the Finance Ministerhas—rendered it a dud. The complicated process involves the setting up of a special purpose vehicle (SPV) by a public sector bank, which would issue securities that would be purchased by the RBI and guaranteed by the government. The funds that accrue to the SPV through the sale of securities would be used to purchase stressed assets of NBFCs and housing finance companies. The catch is that these would apply to only securities of short tenor—up to three months. This scheme is also unlikely to take off because it would result in a mismatch in the borrowing and lending loan maturities of the NBFCs and housing finance companies.

Some of the most outrageous portions of what was expected to be a “relief” package were the abuse of the platform to make deep forays into territory that has since Independence been within the purview of the States. The dismantling of the Agricultural Produce Marketing Committee (APMC) Act in States is an obvious instance of overreach by the Modi regime into an area— agriculture—that is listed as a State Subject in the Constitution. At the press conference, bureaucrats brazenly said the law could be amended to bring the subject in the Concurrent List. Once there, the top bureaucrat triumphantly argued, Central legislation would prevail over State ones. The intent is thus clear: usurp more and more powers from States. This is especially serious because State finances are in dire straits now and the ability of States to stand up to the onslaught is that much more limited.

But the biggest bombshell for States came on the last day when Nirmala Sitharaman announced that they could borrow from the market two percentage points more of their Gross State Domestic Product (GSDP) than the prevailing limit set at three percentage points. The catch was that they could borrow more if they adhered to certain conditions and proceeded to list them out. The imposition of conditionalities made one wonder whether the International Monetary Fund was now based in India! The conditions themselves appear arbitrary and seem to be dictated by the Modi regime’s use of its clout to amend policy at the State level and dub the exercise as “reforms”. One condition demands that States implement the One Nation, One Ration Card scheme; another demands compliance with Modi’s personal favourite, improving ease of doing business at the State level; and yet others demand detailed compliance with conditions set for electricity sector “reforms”.

Assault on States

States are also required to make periodic increases in property taxes, user charges and other levies so that they reflect current inflation. This comes at a time when States have seen their revenues shrink dramatically. Reacting to the conditions, Kerala Finance Minister Thomas Isaac said although meeting the conditions would not be a problem for Kerala, the move “marks a major inroad into States’ autonomy”. Chhattisgarh Finance Minister T.S. Singh Deo said: “This is an attack on the federal structure and is in poor taste. This is an imposition of policy on States. Then why have State governments at all?” M. Govinda Rao, member of the 14th Finance Commission, said the move amounted to the “unprecedented use of the powers of the Centre”. He pointed out that although the law did provide such powers to the Centre, the fact that the powers were never used before was extraordinary. “That this pressure is being applied to market borrowings—not grants—is preposterous,” he remarked in an TV interview.

K. Ramakrishna Rao, Principal Secretary, Finance, Andhra Pradesh, said the letter setting out the conditions was a “bureaucrat’s delight”. “There are conditions after conditions after conditions, and there are even conditions within conditions,” he said in a TV panel discussion.

In effect, over five days Nirmala Sitharaman delivered the painful message that the Modi government was not in any mood to accommodate a policy stance that would provide immediate relief to those most affected by the crisis. Two aspects of what she said, or did not say, stood out because of the clear message they conveyed. First, the lockdown fiasco has exacted a gigantic human toll, most visibly in what it has meant for India’s migrant workforce. Second, the issue of large numbers of migrants going back to their villages in some of the poorest States calls for immediate succour through a massive scaling up of the Mahatma Gandhi National Rural Employment Guarantee Act. On both these counts she obfuscated, misled and even made outrageously false claims.

She claimed that the government was providing Rs.3,500 crore for the supply of foodgrain to eight crore migrant workers for two months. There are several problems with this claim. How does she plan to actually deliver the foodgrains to migrant workers without knowing where they are? She claimed that they are in camps, but we know from the government’s own affidavit in the Supreme Court that more than two-thirds of the workers in camps in India are in Kerala. Clearly, a tiny fraction of migrants, especially inter-State migrants, are living in camps. Certainly, eight crore migrants are not housed in the camps. In fact, media reports indicate that they are on the roads or in the open within cities after being driven away by their employers— after non-payment for work already done. This is compounded by the fact that in most States the Labour departments have no idea about the numbers of migrant workers within workplaces. The permissive regime, bullied in place by industry lobbies and their allies against a mythical “Inspector Raj”, has emasculated these departments.

In effect, we have very little information about who these Indian citizens are, where they are, where they come from and how many they are. The only official information we have is from a decade ago—the 2011 Census, but even this is sketchy. Research and surveys by academics, non-governmental organisations (NGOs) and researchers complete the patchy portrait of the Indian migrant. It is this information vacuum that Nirmala Sitharaman seized to make the grand claim that the government had moved by trains more than 10 lakh migrant workers to their homes. Later, Railway Minister Piyush Goyal, who made the preposterous claim that not a single Indian has died of starvation in the last three months, upped this to 15 lakh workers in 1,150 “Shramik Special” trains. What both Ministers did not do was to set these numbers in a context so that it would indicate the extent of their success.

The Indian migrant worker is of many types—those who are short-term migrants; those whose migration follows a “circular” pattern, implying that they may move back and forth during the year depending on seasonal employment; and those who migrate for work on longer-term employment (of course with no assurance of tenure).

Migrants are also classified in terms of whether they cross State borders in search of work. While it is obvious that the lockdown has impacted inter-State migrants more severely, it is not true that within-State migrants have fared better. For instance, during the lockdown, the Karnataka government decided to allow buses but charged scandalously high fares. For instance, the fare from locations in northern Karnataka to Bengaluru for a family of four amounted to more than Rs.1 lakh. Although Bengaluru has a high population of inter-State migrants, the migration from within the State is not insignificant. In many occupations, there are many workers from within the State—the Uber and Ola drivers, for instance, and those engaged in construction work.

Hapless migrant workers

The face of India’s COVID crisis has been the hapless migrant worker. Not only were migrant workers abandoned for more than two months by their employers, the Union government and most State governments more often than not entered into a tacit deal with the very same employers in a desperate bid to make them stay in order to extract work from them. They have travelled hundreds and thousands of kilometres on foot, on cycles, some even on prosthetic limbs, or on barrows carrying their elderly parents or young or disabled children. Indeed, in their desperate bid to reach home they have tried every means of transport—land, water and even the sea.

So, what does the smug satisfaction that Piyush Goyal and Nirmala Sitharaman draw from their achievement convey? Even if one sets aside intra-State migration in India, the number of inter-State migrants is a whopping 565 lakh (going by figures from a decade ago). Even if only one in four such migrants needs or wants to go home, Goyal would need to move 141 lakh migrants back home. That means that he has completed just a little over one-tenth of what was asked of him by India’s most desperately poor workers. Goyal angrily said States could ask for more trains to transport migrants wishing to return home. After two months in which he did nothing for these hapless people, surely that is churlish.

In fact, inter-State migration reflects a map of poverty in India. Outward migration from four States—Uttar Pradesh, Bihar, Madhya Pradesh and Rajasthan—accounts for half of India’s inter-State migration. On the other side of the equation, Maharashtra, Delhi, Gujarat, Haryana and Uttar Pradesh account for half the inward migration. Placed in this context, Goyal’s sudden rush of enthusiasm is preposterous. The States that migrants are rushing back to are among India’s poorest; their ability to suddenly accommodate the returning workers is impaired by their limited capacity. Goyal ought to ask himself: What was so different 50-60 days ago that he could not run the trains then that he is now willing to ply?

Several State governments have asked migrant workers who wish to travel to register. Although these are known to be restrictive in practice, even a compilation of a partial list of States reveals that at least 55 lakh workers registered by mid May. Rajendran Narayanan, who teaches at Azim Premji University and is associated with the Stranded Workers Action Network (SWAN), which has issued several reports on the plight of the migrant workers during the COVID crisis, pointed out that the registration process was so deeply flawed that it had resulted in a thriving black market for tickets issued for such workers. Poor migrants are paying as much as Rs.8,000 per ticket to travel by bus or train, SWAN stated recently.

In hindsight, the government’ apparently lethargic response to the need for transport for these workers appears to be deliberate. The government and the industry and trade lobbies realise that once the COVID crisis blows away, productivity capacity requires workers to be in their workplace. On May 21, the Confederation of All India Traders, a lobby that has unabashedly backed Modi for six years, demanded that migrant workers be brought back immediately so that businesses could resume. It highlighted its own plight, blamed State governments for having sent back these workers and demanded that the Centre ask the States to get these workers back. Not a word in the statement referred to what triggered the biggest wave of mass migration in Independent India. The Modi regime seems to have intended to keep them locked in in alien cities without any support until the crisis assumed such proportions that the government had to at least appear to be doing something.

Protests in cities and towns across the country and even the sporadic media coverage obviously played a role in forcing the government to act even if only half-heartedly. It has become obvious that the lockdown has more to do with the imposition of the regime’s authoritarian will than with any planned strategy to fight the pandemic. The sudden, obviously coordinated, dismantling of labour legislation in several States, the relentless pressure on India’s federal structure, the far-reaching changes planned in agricultural marketing structures that are likely to drive farmers further to penury, all seem to indicate that the Bharatiya Janata Party (BJP) and the Sangh Parivar intend to seize the lockdown opportunity to strike when resistance is at its weakest.

With the threat of a virus in the air, the contagion fanned in no small measure by sheer incompetence and worse, citizens are in panic. That is hardly a frame of mind that encourages protests. Matters have been aggravated by the lockdown because it sets physical limits to how citizens not only interact with each other but react collectively against such draconian measures. All in all, India enters a dark tunnel, one that would perhaps make the Emergency of the 1970s look like a dinner party.

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