[Document title]

De-stressing the Indian economy -

Economic Stimulus Needed
Urgently

08 May 2020
 De-stressing the Indian economy –
Economic Stimulus Needed Urgently
The COVID-19 pandemic, which came as a bolt from the blue, is hitting economies around
the world very hard. And India hasn’t been an exception to this crisis, with the Indian economy
likely to witness a contraction this year.

The lockdown in India, though necessary from a health perspective, has led to deep distress
in the economy. An immediate substantive stimulus is required from the Government in the
form of support to the poor and support to industry especially the MSMEs. -

The pandemic itself is expected to be with us till the time a cure or a vaccine is found, which
may be 12-18 months away. The recovery process is also expected to take around 2 years,
at the least. Therefore, the fiscal stimulus is needed immediately.

This paper captures CII’s recommendations on the Government support required to kickstart
the economy to save livelihoods and eventually lives. It builds on the suggestions made in an
earlier CII paper, Towards an Organised, Safe and Sustainable Restart of the Economy,
released on 7 April 2020. Since then the economic distress has deepened affecting livelihoods
which would linger for the next year or two.

By the time the lockdown ends, the economy would have lost almost two months of output,
barring essential goods and services where work from home is feasible. Each month of output
lost amounts to roughly 8% of GDP. CII is recommending a stimulus package of at least 7.5%
of GDP to be given immediately. This amounts to a stimulus package of INR 15 lakh crore.
The financial summary of the recommend package is given in Annexure 1. This paper also
suggests the source of financing for the Economic stimulus package recommended.

A. Economic Stimulus Package

A.1 Support to the poor

India has a large proportion of population which is poor and survives on daily earnings and
informal employment with little or no capital or savings. Most of them need immediate
assistance to tide over the current crisis. Based on the most recent estimates of employment,
a total of about 47.9 Crore people are employed in India. Of the total workforce, about 12.0
Crore are employed as casual labour while 6.5 Crore individuals work as helpers in ‘own
account enterprise’ which is typically owned by close relatives or acquaintance, further about
4.8 crore people who get regular wage/salary have non-social security benefits or paid leaves
or have any written job contract. Taking into account all three types, total informal sector

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employment is estimated at 22.6 Crore. Broad estimates of employment by type is presented
in the table below:

Population Employed (Crore) Total Urban Rural

1. Self Employed 25.0 5.3 19.7
1.1 Own Account Workers 18.5 4.5 14.0
1.2 Helpers in HH Enterprise 6.5 0.8 5.7
2. Regular Wage/Salary 10.9 6.4 4.5
2.1 Informal 4.1 2.4 1.8
2.2 Formal 6.8 4.1 2.7
3. Casual Labour 12.0 2.0 9.9
Total 47.9 13.7 34.1
Informal Employment 22.6 5.2 17.4
Source: PLFS 2017-18, UNPOP, CII Research Estimates

The estimate for informal employment does not include people who are self-employed as own-
account workers, majority of whom will also be needing support since they typically work in
micro establishments with very little reserves. A lot of people who are unemployed and out of
labour force will also be vulnerable, needing support.

Cash transfers should be made to as many people as possible at the bottom of the pyramid,
by transferring about Rs 2.0 Lakh Crore directly to the Jan Dhan accounts of the poor to help
them tide over this crisis. This should be done in addition to Rs 1.7 Lakh Crore stimulus already
announced. It should be ensured that migrant labourers receive money in their accounts, so
that they are encouraged to return to the workforce.

A.2 Wage Support to Workers

All regular wage employees, including those in MSMEs, should be eligible for wage support
through working capital loans taken by their employers.

Loss of economic activity in the absence of any meaningful capital has deprived businesses
to earn revenues and pay wages to their workforce. To avoid job losses in the post-lockdown
scenario, enterprises need immediate support to pay salaries and maintain the level of
employment.

Banks should provide additional working capital limits, equivalent to April - June wage bill of
the businesses, backed by a Government guarantee, at 4-5 per cent interest, with a refinance
guarantee from RBI. A similar carve out could be provided for the April – June interest
obligations of the stressed sectors.

We recommend a provision of Rs 2 Lakh Crore to be spent on helping enterprises in meeting

their wage and interest payment requirements for the next three months. This will enable the
government to cover for wage payments towards workers earning below a certain limit that
the government can set using the income tax data.

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A.3 Credit guarantee scheme for MSMEs

A credit protection scheme for MSMEs whereby 60-70% of the loan should be guaranteed by
the government, i.e. if the borrower defaults, government should repay the bank upto the
amount it has guaranteed, so the risk to the lender is limited. Often, the guarantee acts as a
signalling mechanism by which banks are encouraged to increase their credit and if the
economy turns around the default rate may be limited.

The allocation for this guarantee can be kept at Rs 2 lakh crore, though this may not entirely
be utilised. It may be noted that a large allocation needs to be made to give assurance to
banks, though these may not actually be used.

Given that outstanding payments to MSMEs are in the range of Rs 6 lakh crore, the payment
portal which will record such delayed payments needs to be created on an urgent basis.

A.4 SPV for investing in corporate bonds

The creation of a fund or SPV with corpus of Rs 1.4 - 1.6 lakh crore which will subscribe to
NCDs/Bonds of Corporates rated A and above. The fund can be seeded by the Government
contributing Rs 50,000 crore, with further investments from banks to the tune of Rs 40,000-
50,000 crore and balance Rs 50,000-60,000 crore brought in by financial institutions such as
LIC, PFC, EPF, NIIF, IIFCL et al.

The same government guarantee discussed in the previous section would be used to
encourage subscription to these bonds.

A.5 Public works programme

Funding public infrastructure has been a tried and tested route of stimulus that not only creates
demand for many industries but also creates jobs as well as improves long term productivity.
This amount should be utilised in building public infrastructure in close co-ordination with
states. The suggested areas include, roads, railways, ports and industrial parks. A measure
like this will have multiple benefits, as it would stimulate the economy through public
expenditure, induce private sector capital formation and provide employment to a large section
of the informal workforce.

An allocation of a total of Rs 4 lakh crores needs to be made, which can further rope in private
investors and investment funds such as the NIIF to increase the size of the investment pie.
Given the challenge of project implementation, the spending can begin with the completion of
projects that have already begun, such as roads which are stalled after 80% of the job is
completed. This will enhance productivity immediately.

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A.6 Discom bailout

The state-run electricity distribution companies have been accumulating losses and their
bailout has become necessary, as state governments are not able to bear the loss. An
allocation of Rs 2 lakh crore can be made, of which Rs 1 lakh crore is disbursed immediately
and a similar amount later, when distribution companies fulfil their reform targets.

A.7 Bank recapitalisation

Given that liquidity has dried up for almost all industrial units especially for MSMEs, there is a
high likelihood of defaults on debt servicing by industry. The current exposure of banking
sector (as on 27 March 2020) to private corporate sector including MSMEs are at Rs. 29.05
lakh crores of which 4.87 lakh crores are for MSMEs. Given the likelihood that, the
unprecedented economic crisis in the real sector would soon transmit to financial sector, it
would be prudent to allocate adequate backup in terms of allocation for recapitalisation of
banks to ensure that the banking system maintains strong capital adequacy as a backup for
potential bad assets that may creep into the banking system. Hence an allocation of Rs 2 lakh
crores for bank recapitalisation would be prudent to manage any surge in NPAs of public
sector banks.

B. Financing the Stimulus Package

Financing the Stimulus Package needs to be diligently chosen to ensure stable macro-
economic environment to a large extent.

• Given the loss of livelihood and resultant subdued demand, inflationary pressures are not
likely to emerge in the near term. Further, with a good Rabi crop and Oil prices moving
southwards, inflation is not expected to arise for some time. In these circumstances,
monetisation of Government borrowings could be used as a reflationary tool. We suggest
Rs 2 trillion of government paper to be subscribed by the RBI each year.

• An equivalent amount can be borrowed by the Government from the secondary market.
We suggest that additional borrowing of Rs 2 trillion each year. The impact on interest
rates will be muted, given the subdued inflationary trend mentioned above.

• The Government could also look at substantial reduction in expenditure by reducing some
of the centrally sponsored schemes and directing these towards states’ expenditure on
health. Further, there are many items that have already been budgeted but may not have
been spent in the current year. These need to be identified and utilised for financing the
stimulus package for better efficacy of public expenditure. The reduction in the dearness

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 allowance would also save some funds. We believe expenditure reduction of Rs 4 lakh
crore this is year and Rs 1 lakh crore next year is possible.

• Revenues could be raised through disinvestments. Currently about 57 PSU listed

companies excluding those in the banking and financial sector have an average equity
holding of about 71%. The average market capitalisation of these companies is at Rs 10.63
lakh crores. The Government could target about 30% of these holdings to raise resources
of around Rs 2 lakh crores spread over the next two years, which could be channelized
for funding public infrastructure. The Union Budget in the current year has targeted Rs 2
lakh crores from disinvestment.

• Government of India issued resurgent India bonds in 1998 which was successfully
subscribed. The Government could look at a similar long-term bond of 10-year tenure or
more to borrow from global markets. The Indian paper would be attractive as it is much
more remunerative when compared to other countries which have yields at less than 1%
and the growth story of India is promising. With promising yields, if structured well we can
look at raising Rs 1 lakh crore of financing each year through this route.

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 Annexure 1

Contours of the suggested fiscal stimulus plan

Spending head Amount (Rs lakh crore)

Cash transfer through JAM 2.0
Wage support 2.0
Credit guarantee (MSMEs) 0.5
SPV for investing in corporate bonds 0.5
Infrastructure 4.0
Discom bailout 2.0
Guarantee on credit + SPV 2.0
Bank recapitalisation 2.0
Total 15.0

Financing of the stimulus plan (Rs lakh crores)

Expenditure reduction 4.0
Revenue increase (divestment) 2.0
Domestic borrowing 2.0
Foreign borrowing 3.0
Monetisation 4.0
Total 15.0

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