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myashpal · 4 years

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Counting the zeros of 2,00,00,00,00,00,000 in 2020.

The ‘fiscal stimulus’ package of nearly ₹20 lakh crore that was announced on May 12th, by our honourable Prime Minister, is not actually as relieving as it sounds. There will be nothing wrong if I say that the package is transcendent for the ‘Headline Management’ rather than crisis management and it was all about marginalising the screen time of migrant labour distress. It should be kept in mind that the Union budget for year 2020-21 was ₹30.4 lakh crores (to be very precise ₹30,42,230 crores), which is approx. 15% of the GDP of the country. Total GDP of India is ₹190.54 lakh crores (US$ 3.2 trillion)

Last year central government announced a package of ₹100 lakh crores for infrastructure development projects. Now the question arises that if the last years budget of the government was ₹30.4 lakh crore, then how can it announce a package of worth ₹100 lakh crores? Well, “la risposta si trova qui!” (the answer is here!)

In that package the total budget expenditure of the government (in simple term — engagement of govt. money) was only about ₹7,000-8,000 crores and the remaining amount was to be financed to infrastructure companies by banks as loans. The banks didn’t financed the infrastructure projects because they found that many of the infrastructure companies were already running in huge losses and were turning into NPA’s. As a result, that package halted there only.

Structure of the so-called 20 lakh crores package (as per announced by govt.) —

March 26th, 2020 - ₹1.92 lakh crores

May 06th, 2020 - ₹8.1 lakh crores (by RBI)

May 13th, 2020 - ₹5.94 lakh crores

May 14th, 2020 - ₹3.10 lakh crores

May 15th, 2020 - ₹1.5 lakh crores

May 16th, 2020 - ₹81,000 crores

May 17th, 2020 - ₹40,000 crores

The fact here to be remembered is that - ‘currently we need to restart our economy, not to stimulate it.’ Stimulation is provided when a running economy is going through a slowdown. Presently, we are at 0% growth where all the business enterprises were fully shut since more than 50 days. A slowdown could be stimulated, but not breakdown.

There are three kinds of packages —

Fiscal package - expenditures from the government's earnings for public in form of tax subsidies, direct transfers and injecting funds directly in the economy.

Financial package - government asks banks to provide finance to citizens for boosting economy by liberalising rules for loans or sometimes acting as a guarantor to banks.

Monetary package - RBI decides to infuse liquidity in the economy by reducing repo rate**, so banks can provide loans to public at lower interest rates.

A ‘financial package’ can’t be termed as ‘stimulus’ package because the process of granting a loan entirely depends upon the bank, it is a transaction between a bank and the applicant. Government here, can only be a facilitator among both. Whether bank will sanction/provide a loan or not, depends fully upon the credibility of that applicant.

On May 13th, finance minister Nirmala Sitharaman announced that ₹3.7 lakh crores from the total package of ₹20 lakh crores, would be provided to MSME (Micro, Small and Medium Enterprise) sector as debt finance (loans), guaranteed by the central government. She also added that a 12 month moratorium period will be provided to Small Enterprises.

It must be committed to the memory that — ‘moratorium’ will only be for the principal amount but the interest calculated by banks would be on a ‘compounding’ basis. Compounded calculations of interest for 12 months for a Small Enterprise is not an easy play, where interest rates would be decided by the banks. This package was entirely dependent on the sole discretion of banks, whether to provide loans or not and also upon the enterprise’s willingness to take up a loan. The entire focus of this package is only upon — loan, loan, cheap loan, MSME loan and loan. People are being pushed to a system which is entirely based upon the ‘debt/credit finance’.

Post 9 to 12 months scenario due to this package :

After the period of about one year, we might experience that a majority of depositors will be seen, whose deposits will get eroded in terms of interest. They will not even be getting as much returns as their cost of living or inflation would have been. SBI had reduced its interest rates on the fixed deposits thrice, in the last 4 months.

Indian banks who were already trapped in a web of bad debts will be groaning, because of distribution of these new loans. It is also possible that we may experience a completely new explosive form of debt crisis.

There is also a possibility of bank loan scams making a comeback in the Indian economy on an extensive scale because of political interference for compelling banks to provide loans to the dear ones or relatives of the politicians.

Till February 2020, Indian banks were already burdened with NPA’s of ₹9.9 lakh crores, and government was pressurising them for not sanctioning any more loans because of the growing numbers of NPA’s & frauds. Government was telling banks to clear their balance sheets by various means — bankruptcy code, writing off loans, putting provision funds for bad debts, creating bad banks etc. India’s major pre COVID economic highlights were only about ‘troubles of the banking sector’.

Just with the outbreak of COVID-19, the very first steps took by the RBI were — releasing liquidity of ₹4 lakh crores to banks to provide economic stimulus to various sectors as loans and, reducing the repo rate from 5.15% to 4.40% (cutting it by 75bps), it was the lowest in the history of the Reserve Bank of India. As a result, all the retail loans also hit the record low (in rates and demand), ever since 2009. Finance Minister admitted that banks are sanctioning loans but consumers are not willing to take them. Even one-third amount of the funds that RBI released for various sectors (Mutual Funds, NBFC’s, DISCOMs) were not used by the banks.

On May 4th, 2020, banks returned ₹8.54 lakh crores to the RBI via ‘reverse repo’ window. So, the RBI slashed reverse repo rate window because of this. On this event, FM Nirmala Sitharaman told that banks are not distributing loans and are keeping funds with the RBI. The banks were provisioning funds for future balancing for NPA’s and moratoriums, amid this, the RBI announced that it will not provide any dividends for the current year. Banks were calculating the losses that they had to bear in the coming year due to bad loans & NPA’s.

Suddenly, out of the way, May 12th, 2020 on 20:20hrs, a relief package of ₹20 lakh crores descended, and was announced with idea of “AatmaNirbhar Bharat” (Self-reliant India) by the PM Narendra Modi and was quoted as — “20 lakh crore in 2020”.

The basic default rate in India is close to 15%. So, if we calculate the maximum risk on the government for MSME sector package of ₹3.70 lakh crores, it will be around ₹15,000 - ₹20,000 crores. That also on a condition — ‘if’ these loans will get disbursed and get default, then only these would be repaid from the government treasury. The intent of government was not clear on emphasis to provide new loans to the bad MSME’s which are already in default and running in losses.

The contradiction and ridiculousness —

Just before a month from now (in April 2020), the government was directing banks to pause recoveries/provide moratoriums for a period of 3 months to the people and industries because they hadn’t performed any business operations as everything was completely closed due to the nationwide lockdown. And now (May 2020), the government is telling for those same industries, to take up a new loan to restart their business operations. It is quite obvious in nature that any enterprise will primarily focus to repay the existing/ongoing loans rather than taking up a new one.

The total amount of loans distributed in the Indian Banking System (IBS) is nearly ₹93.8 lakh crores, in this, ₹56 lakh crores is distributed to large industries, ₹11.8 lakh crores to agriculture industry and ₹26 lakh crores are personal/other retail loans including loans to small industries. The small industries for whom the package of ₹3.7 lakh crores was announced, are the industries that are already in debts of ₹10 lakh crores.

Till February 2020, these small industries were requesting the governments for restructuring of their loans and stop recoveries as they were going through a very bad phase due to the slowdown, since 2 years. Now the question is, Why the enterprises who were unable to repay their existing loans and demanding for restructuring of their loans in normal days, would take a new loan in a juncture when there is total ‘uncertainty’ for demands and supplies? Many industrial reports had caveated that a large number of defaults in retail loans will take place in the coming 6-9 months because of the unemployment occurred and occurring during & after the lockdown. The major problem of the Indian economy before the COVID-19 was only the debt-crisis — the debts in company’s accounts, debts in bank’s accounts, debts in state and central government’s accounts, and when the people were already struggling hard to get rid of the debt cycle; they suddenly are being sent back to a system where they should be going to take up another new debt, due to COVID-19 crisis. At last, I would conclude myself with the famous lines of the scholar ‘Nassim Nicholas Taleb’, — “The solution for a debt-crisis in any economy, cannot be a new debt”.

- M. YASHPAL

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