Finance minister Nirmala Sitharaman is set to announce a long-awaited stimulus package for businesses and workers to soften the devastating blow from the coronavirus lockdown that has pushed many companies to the brink of bankruptcy with revenues and cash flows disappearing overnight.

Sitharaman met Prime Minister Narendra Modi on Thursday to finalize the measures and an announcement is expected soon, two government officials said on condition of anonymity. One of the measures being considered is to subsidize wages, based on a German model that gave people short-time work or Kurzarbeit, helping Europe’s largest economy emerge from the 2009 recession faster than others.

With the Indian economy, by some estimates, set to report its first contraction in more than four decades, the focus of the government is to use its limited fire power effectively. Sectors such as real estate, aviation, automobiles, tourism, capital goods, metals and mining, and consumer durables have been the worst hit by the lockdown that has now been extended to 40 days.

Indian industry has been miffed by the government’s delay in announcing the package. Pay cuts have become a norm across sectors as cash flows have dried up. Some companies have even fired employees.

Lobby group Confederation of Indian Industry (CII) said that there is an urgent need to provide credit to industry.


“Our recommendation therefore is for all banks to provide additional working capital to all companies, equivalent to their three-month salary/wage bill at an interest rates between 4% to 5%. This would need to be guaranteed by the government so that it can step in and back stop the banks in case the companies fail to pay up and RBI (Reserve Bank of India) can provide a refinance guarantee on the same too,” CII said in its latest report.

On 26 March, the government announced a 1.7 trillion relief package, which many economists have termed as inadequate. There is a growing chorus of voices demanding a 9-10 trillion stimulus worth 4-5% of gross domestic product to support growth and employment.

The economic package is crucial for most businesses to stay afloat and comes amid the government unveiling an initial plan to put the virus-savaged economy back to work and restore its broken supply chain.

Starting 20 April, India will allow key parts of the economy, including agriculture, logistics, infrastructure, e-commerce and factories located outside the municipal corporations and municipality limits), to return to work in so-called green zones, areas where no infections have been reported.

The main focus of the stimulus package may, however, be on micro, small and medium enterprises (MSMEs), the government officials said.

To deal with the problem of liquidity, small businesses have urged the government to facilitate refunds of income tax and goods and services tax (GST) at the earliest. They have also demanded imposition of safeguard duties to protect the domestic industry from cheap Chinese imports, extension of the recently announced three-month moratorium to one year, merger of 18% GST slab with 12%, among other steps.

“There is certainly a need to support the MSME sector. The challenge, however, will be to identify businesses in dire need of funds and those who have been affected the most by the current crisis. MSME is a broad category and businesses are spread across various industries,” said N.R. Bhanumurthy, a professor at National Institute of Public Finance and Policy.

State chief ministers have also pitched for a fiscal stimulus package and more financing options during a videoconference with Prime Minister Narendra Modi on 11 April.

The International Monetary Fund has said that India should ease its fiscal stance and announce a stimulus package to counter the sharp slowdown in economic growth and job losses expected from the nationwide lockdown.

“The government will ensure that no payment or dues are pending from its side. This will ensure there are no liquidity-related issues,” said one of the officials cited above.

Industry body Assocham has also been lobbying the government for further reduction in interest rates and suspension of bankruptcy code provisions for six months.

With revenue streams under strain due to uncertainty in tax collections, the government may not be in a position to announce big-bang measures at the moment, the official said, adding that a larger stimulus could be announced after the lockdown is lifted and business activity resumes.

The government finds itself staring over a precipice with the International Monetary Fund on Tuesday slashing its FY21 growth projection for India to just 1.9% from 5.8% projected in January. Barclays cut its growth forecast for the country to 0% for 2020.

Opposition parties have also been clamouring for a stimulus package to limit the damage to the economy and livelihoods of the poor. Congress leader Rahul Gandhi and Congress president Sonia Gandhi have written several letters to Modi, drawing the Union government’s attention to issues being faced by migrant labourers, food shortage, economic boost to MSMEs and relief to middle class.

News Source: Livemint


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