Sitharaman’s Fifth Tranche Gets High On Reforms, Low On Stimulus With Rs 20-Trn Package

With the ease in few norms, we move towards 4.0 lockdown which on May 17 was extended to May 31. During a press conference Finance Minister Mrs. Nirmala Sitharaman announced Rs 20 trillion package. Although it provided little immediate relief except increasing allocation to its flagship rural job scheme by 66 per cent but used the pandemic to usher in bold public sector reforms, however the FM pitched them by saying all sectors would be open to the private sector.

State-owned units will remain only in strategic areas, which, however, are yet to be defined, while those in other areas will be privatised, according to public sector enterprise policy, which the government will detail later.

Union Finance Minister Nirmala Sitharaman gave leeway to states in terms of market borrowing, but much of it is conditional on reforms, such as the one-nation-one-ration card. The government will release Rs 4.28 trillion for states but will widen the fiscal deficit to 5 per cent of state gross domestic product for each. This, together with the Centre’s additional borrowing of Rs 4.20 trillion, will take the combined fiscal deficit of the country to well over 10 per cent of gross domestic product.

Most of the reforms announced in the areas of insolvency and the Companies Act have been re-packaged with some additions. But some of these additions will have ramifications, such as extending the suspension of the Insolvency and Bankruptcy Code to one year, against six months announced earlier, and the insolvency framework for micro, small and medium enterprises.

The government will increase its outlay for the health sector to improve infrastructure in blocks, but the FM did not specify by how much.

She said the government would expand the digital platforms for imparting education to school students and come up with Manodarpan, an initiative to improve the mental horizons of students, teachers, and their families.

Even now all the sectors, except atomic energy and railway operations other than construction, operation, and maintenance in select areas, are open to the private sector, according to the site of the Department for Promotion of Industry and Internal Trade.  Even here, the Budget for 2020-21 had announced allowing public-private partnership in Railways.

Sitharaman said the strategic sectors where the public sector would be present would be notified. In these, at least one enterprise will be a public sector company, but the private sector will be allowed. PSUs will be privatised in all other sectors, she said. Partha Chatterjee, professor and head of economics, Shiv Nadar University, said: “These will not have much impact in dealing with the crisis right now.”

According to the SCOPE site, there were 70 loss-making central PSUs and 178 profit-making units in 2018-19. The government’s flagship scheme — the Mahatma Gandhi National Rural Employment Guarantee Act — will get Rs 400 billion more than the Budget allocation of Rs 610 billion because demand for work in rural areas has increased due to migrant workers returning to villages.

Sitharaman said this would help generate nearly 3 billion person days in total. A total of 2.64 billion person days were generated in 2019-20 under the scheme. However, comparison should be made with the Rs 710 billion spent on the scheme in 2019-20, experts said. So, the increase is 42 per cent and not 66 per cent.

However, this increase would be linked to strict conditions. Immediately after Sitharaman’s briefing, the Finance Ministry issued a memorandum to states detailing these conditions and goals. The FM said this would give states “extra resources of Rs 4.28 trillion”. The move comes just a week after the Centre increased its own borrowing target for the year by Rs 4.2 trillion.

Sitharaman said that part of the borrowing would be linked to specific reforms, which include some of the recommendations of the 15th Finance Commission’s first report. The four areas which the borrowing would be linked to include universalisation of ‘one nation, one ration card’, ease of doing business, power distribution, and urban local body revenues.

“The states have been given specific, measurable targets under each of these areas,” a top government official said. The targets have been given to ensure sustainability of additional debt through higher future GSDP growth and lower deficits, promoting welfare of migrants, reducing leakage in food distribution, increasing job creation through investment, safeguarding the interests of farmers while making the power sector sustainable, and promoting urban development, health, and sanitation. “The states have to ensure that there is an improvement in their fiscal deficits. It can either be through higher revenues or higher growth,” the official said.

Sitharaman said that of the states’ existing total borrowing requirement of around Rs 6.4 trillion in 2020-21, they had been authorised to raise 75 per cent in March itself. But only 14 per cent of that 75 per cent has been used by states, she said.

She said that beyond the 3 per cent of GSDP borrowing limit, there would be an unconditional increase of 0.50 per cent. “This adds to the 25 per cent of the original borrowing limit that is still not authorised. When that is given, it will be unconditional as well,” the official quoted earlier said.

Now beyond the limit of 3.5 per cent of GSDP, an increase of 4.5 per cent of GSDP will be allowed in four tranches of 0.25 per cent, with each tranche linked to clearly specified, measurable, and feasible reform action. “Further 0.50 per cent, which will take the limit to 5 per cent of GSDP, will be allowed if milestones are achieved in at least three of four reform areas.”

West Bengal Finance Minister Amit Mitra said: “This is another smokescreen. It should have been increased from 3 per cent to 5 per cent. Instead, it has been made unconditional up to 0.5 per cent and the rest is being dictated by the Centre. This is a way of undermining the autonomy of the states.”

“States are being allowed to borrow with conditions dictated by the Centre without any discussion with the states. It is a serious undermining of the federalist structure. Every time we go to the market to borrow, the Centre has to okay it, so where is the need to attach conditions,” he said.

Kerala Finance Minister Thomas Isaac said with the raised borrowing limit, the state would be able to raise Rs 18,087 crore, but added that the calculation should be made on the basis of the allocation made in the Central Budget and not on the current GDP, which will soon turn negative for both state and Centre.

R K Gurumurthy, head of treasury, Laxmi Vilas Bank, said: “The increased borrowing limit will certainly help states fund the revenue shortfall arising out of the extended lockdown and declining economic activity. However, this additional facility is contingent upon certain reform milestones and states will be eligible only on achieving them. There are many moving parts and, hence, it may take time to translate into a liquidity impacting measure.”

According to D K Srivastava, chief policy advisor, EY India, not many states may avail of the entire incremental amount due to the likelihood of a tangible increase in the borrowing cost because of the large gap that appears to be emerging between the total public sector borrowing requirement and the available resources.

By

Babita Sharma

Editor, INBA