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The Rs 20 trillion economic revival package announced by Prime Minister Narendra Modi is among the most substantial in the world. Of the five pillars identified by Modi to support the edifice of a New India, infrastructure occupies the second place. So, is that a clarion call for a New Panchsheel?
Political analysts often say that Prime Minister Narendra Modi is his own man who takes a bold decision when least expected, be it demonetisation, surgical strikes on terror camps across the country's international boundaries, nationwide lockdown for the containment of COVID-19 pandemic or the May 12 announcement of a Rs 20 trillion stimulus package to boost a beleaguered economy.
A couple of days before the announcement, the New Delhi-based Confederation of Indian Industry (CII) had sought an "immediate substantive stimulus" of Rs 10.5 trillion to support the country's poor and the industry.
Modi's announcement of Rs 20-trillion package left most people pleasantly surprised. "If we are determined, we can reach our goals and no path will be difficult. Today, there is a will and there is a way. That is to make India self-reliant. Our combined resolve is so strong that India can become self-sufficient," Modi emphasised while announcing the package.
5 Pillars: Economy, Infra, System, Demography & Demand...
The prime minister defined the five pillars that would support the edifice of a new India. The first pillar was the economy that led to a quantum jump rather than incremental change in growth. The second was the infrastructure that was the identity of a modern India. The third pillar was the system driven by technology to fulfill the dreams of the 21st century. The fourth pillar was the world's second-most populous nation's vibrant demography that would power its pursuit of self-reliance. The fifth was demand, which could be leveraged only by harnessing the full potential of the demand and supply chains.
The prime minister then went on to officially announce the package with the resolution of...Atmanirbhar Bharat Abhiyan or the "Self-Reliant India Campaign"...
"This package is about 10 per cent of India's GDP. With this package, various sections of the country and those linked to the economic system will get support and strength of Rs 20 trillion. This package will give a new impetus to the development journey of the country in 2020 and a new direction to the self-reliant India campaign," he averred, adding,"In order to prove the resolve of a self-reliant India, land, labour, liquidity and laws, all have been emphasised in this package."
...This could invite comparison with former US president Franklin Delano Roosevelt's New Deal programme during the time of the Great Depression. In an article published in the January 2017 issue of the magazine...Popular Mechanics, author Matt Blitz noted, "Roads were built where there once was only dirt. Bridges connected lands that were once separated. Airports and runways made people airborne. Power lines brought light where there once was only darkness after sunset. And most importantly, the unemployed were once again hard at work. It was the greatest infrastructure project in this country's (US) history, the likes of which we'll never see again."
...Roosevelt is among the few foreign leaders that Modi most likely admires. His month-end Mann Ki Baat (roughly translating as "Matter of Contemplation") radio programme is inspired by the American leaders" "Fireside Chats" to address the fears and concerns of fellow Americans. Then Modi's latest deal is for what he often fondly calls a "New India"....
Contrary to popular belief, Roosevelt's New Deal wasn't a socialist programme, but a chain of evolving schemes, public work projects, financial reforms and regulations aimed at reviving the US economy.
The immediate reaction to the prime minister's address was euphoric. In his tweet sent out the same night, Anand Mahindra, Chairman of the $6.34 billion Mahindra Group, noted, "This was the PM's Carpe Diem (Seize the Day) speech; an opportunity to change the narrative from "Survival" to "Strength" We will know tomorrow whether or not this is going to be a transformational moment like 1991. What I also believe is I won't get much sleep tonight!"
áModi said that the holistic package had been formulated keeping in mind the requirements of industry segments from the cottage industry to micro, small and medium enterprises (MSMEs) to the farm sector....
Broadening the Scope
Also, in one of his most recent commitments to provide a major push to economic growth, the prime minister hinted at broadening the scope of reforms. ôThese reforms will be for, rational tax system, simple and clear rules-of-law, good infrastructure, capable and competent human resources, and building a strong financial system. These reforms will encourage business, attract investment and strengthen our resolve for Make in India,... he added.
In a recent piece published on INFRASTRUCTURE TODAY's website, Anuj Puri, Chairman...of the real estate consultancy, ANAROCK Property Consultantsáhas argued that at a time several manufacturing firms are actively looking at shifting their manufacturing base out of China, the country needed to make land acquisition laws more attractive.
"A major challenge in implementing speedy, universal land reforms in India is the fact that land is a state subject," wrote Puri, adding, "reforms should be integrated at the local level, but most states dilute the applicability of progressive clauses for various reasons. The fact that states can choose not to adopt central land laws undermines the possibility of speedy reforms."
For instance, the magazine has learned that the acquisition of around 1 per cent of land for the upcoming Navi Mumbai airport has hit a roadblock after some villagers demanded much higher compensation than what was earlier agreed upon with Maharashtra state's City and Industrial Development Corp. (CIDCO).
Be Vocal About Local
The prime minister also emphasised the need for India to play a much bigger role in the global supply chains by making the domestic industry competitive and efficient. He suggested that one good way of achieving that was by giving adequate importance to the development of local manufacturing, market and supply chains.
The package comprises the March announcement of Rs 1.7 trillion of free foodgrains and cash to poor as well as the central liquidity measures and interest rate cuts laid down by the Reserve Bank of India (RBI). The central bank has cut interest rates four times by 250 basis points (BPS) since February 2019.
The package also ranks among the most substantial in the world. According to the German online portal Statista, the financial packages announced by the US is 11 per cent of its GDP, Japan over 21 per cent of its GDP, Australia 9.9 per cent of the GDP, EU 4 per cent of the GDP and Brazil 6.75 per cent of GDP. Meanwhile, the relief package announced by China is 2.5 per cent of its GDP.
In one of her first media briefings after the prime minister's address, Finance Minister Nirmala Sitharaman said, "The idea is not to make India an isolationist country, but to build a confident India capable of contributing to the world's growth."
The industry was also expecting a slew of bailouts for sectors like aviation, real estate and hospitality. According to an estimate by the country's leading financial advisory, CRISIL, the country's civil aviation industry could be looking at an accumulated loss of nearly Rs 250 billion this fiscal.
Shot in the Arm
While terming the package as "shot in the arm of the economy,"Dr. Niranjan Hiranandani, President, ASSOCHAM, and Founder & Managing Director, Hiranandani Group observed, "The economic stimulus lays emphasis on key issues like land, labour, liquidity and laws, and is indeed a well-thought-out reform. However, a fiscal stimulus for the real estate sector was missed. The industry had pegged its hopes on fiscal relief to be granted to the second-largest employment generating sector as liquidity infusion will be imperative to turn around the sector."
But other than the poor, the Modi government has stopped short of offering any free lunches as the belief is the move could have led to more such demands. And despite factors such as an increase in borrowing programme to Rs 12 trillion from Rs 7.8 trillion the legroom available to the government is limited as its revenue from taxes is expected to sharply decline during the two-month-long lockdown....
A Mumbai-based economist told the magazine on condition of anonymity, "Although some commentators have talked about deficit monetisation by RBI, the government has rightly refrained from such action due to the potential of a ratings downgrade by the rating agencies. Structural reforms and infrastructure spending are likely to support the economy in the long run and would have limited impact in the short run. The government has also maintained some buffer in terms of actions as the coronavirus story is likely to play out over the course of the next six months and they didn't want to make all the announcements in one go...
Revival of MSMEs
The package provides for Rs 450 billion Partial Credit Guarantee (PCG 2.0) scheme for non-banking financial companies (NBFCs). It also has a Rs 300 billion special liquidity scheme for NBFCs, housing finance companies (HFCs) and microfinance institutions (MFIs) with a full guarantee by the government.
The government will also be spending Rs. 183 billion to revive the MSMEs. This is an important step as it is the creation of a vibrant MSME ecosystem that is responsible for economic miracles such as Germany, Japan, South Korea, Taiwan and, most recently, China. In this regard, the role played by mittelstand firms in eurozone's largest economy, Germany, is particularly noteworthy.
Important measures include a change in the definition of MSME with revision in investment limit and introduction of turnover as an additional criterion. The package provides for Rs 3 trillion collateral-free MSME loans and Rs 200 billion subordinated debt for stressed MSMEs. There is also provision for Rs 500 billion equity infusion for MSMEs through funds of funds. Although overseas analysts have described it as a protectionist move, global tenders of value up to Rs 200 million for government procurement have been disallowed in favour of MSME firms. In the infrastructure sector, brickworks and manufacturers of small construction equipment belong to this category.
"The government has taken an excellent initiative of coming up with a loan guarantee scheme of Rs 3 trillion for the MSME segment. Because the MSME segment is the bulwark of the Indian economy with a share of around 45 per cent of the GDP, this initiative would go a long way in buttressing the fundamentals," the Mumbai-based economist told the magazine."
In the power sector, Rs 900 billion liquidity infusion for distribution companies via Power Finance Corp. or REC against receivables has been provisioned. Similarly, rebate for payment to be received by generating companies will be passed on to industrial customers....Rajiv Srivastava, Managing Director & CEO, India Energy Exchange (IEX) said, "The most remunerative source of income for distribution companies from industrial and commercial users has been deeply impacted by the COVID-19 lockdown. The Rs. 900 billion liquidity injection is a welcome relief for financially stressed distribution companies. Measures like PFC or REC loans, rebates and reforms announced by the Central Government will go a long way in creating the much-needed fiscal space in the power sector value chain."
áIn the real estate sector, an extension of registration and completion of real estate projects under Real Estate Regulatory Authority (RERA) for all projects in or after March 2020 for six months, which can be extended for three more months if needed, was announced. The timeline for availing the Credit Linked Subsidy Scheme (CLSS) under the Pradhan Mantri Awas Yojana-Urban (PMAY-U) has been extended by a year till March 31, 2021, for those with an annual income between Rs 600,000-1.8 million. áIn the construction sector, a six-month extension without cost escalations for milestone completion without penalty has been provided to government contractors. For the aviation sector, the package proposes efficient airspace management, rationalisation of taxes for the Maintenance, Repair, Overhaul (MRO) segment and building of more airports under the public-private partnership (PPP) model.
...In the mining sector, the government is expected to offer 500 mineral blocks, including 50 coal blocks, for exploration. The Cabinet Committee on Economic Affairs (CCEA), chaired by the prime minister approved the methodology for auction of coal and lignite mines or blocks for sale of coal and lignite on revenue sharing basis and increased the tenure of coking coal linkage. Rebate will be offered on revenue sharing quantum to incentivise early operationalisation and higher produce. There is also a provision of Rs 500 billion for evacuation infrastructure.
An authorised spokesperson of construction to biotechnology conglomerate, Shapoorji Pallonji, informed, "The construction companies are now finding it difficult to convince their labour sub-contractors and the workers to stay back and resume work. The companies are facing this new challenge of resuming construction activities without having adequate worker strength. As the supply chain for construction materials is expected to be normalised in the next few weeks, insufficient labour strength could severely impact the construction operations."
...There is an additional challenge of creating jobs in the time of Industry 4.0 when manufacturing processes are getting increasingly automated. Declared Piyush Somani, Chairman & Managing Director and CEO, ESDS Software Solution Pvt. Ltd, "In the future, there are going to be at least two machines between us while communicating. Similarly, there would be a lesser workforce and more machines in factories with the deployment of artificial intelligence (AI), robotics, automation and video surveillance analytics."
The exodus of workers, though temporary in nature, might lead companies to hasten automation. This will result in headcount coming down substantially in sectors like construction and manufacturing. áHowever, the stimulus measures have also come in for criticism on some counts. In a video conference, former finance minister and senior counsel, Palaniappan Chidambaramásaid the actual size of stimulus measures was way less than what was projected and that several sections like the poor, migrants, farmers, labourers, workers, small shopkeepers and middle class were ignored. "In our view, a fiscal stimulus of Rs 1.86 trillion amounting to barely 0.91 per cent of GDP will be totally inadequate given the gravity of the economic crisis and the dire situation in which people find themselves."
However, disagreeing with Chidambaram's calculation, the Mumbai-based economist observed that the biggest challenge with the package was that it was primarily focused on supply-side reforms. "The announcements of the Indian government do not provide for any direct income support or indirect support in the form of tax cuts to the bulk of the population that would have acted as a support for consumption in the Indian economy - the biggest requirement to kickstart growth in an economy that is ravaged by both demand and supply side contractions," he said.
...The prime minister's address also had a subtle geopolitical messaging that was missed by most commentators. His emphasis on self-reliance was also about preparing the world's largest democracy to replace- or at least equal China- as the world's manufacturing hub in a post-COVID-19 environment. In 1954, Jawaharlal Nehru's India signed an agreement with Communist China on five principles of peaceful coexistence or the Panchsheel Treaty. Yet, that couldn't prevent a bloody border skirmish between two of the world's most ancient civilisations in the eastern sector in 1962.
Although calm has prevailed on the India-China border since the 1967 clashes at Nathu La, Sikkim, an increasingly aggressive China has been giving sleepless nights to its immediate neighbours in the South China Sea region as well as the western bloc led by the US. Amid the latest reports of heightened tension and troops build-up on the Sino-Indian border in Ladakh, the stimulus can be seen as Modi's way of unveiling a New Panchsheel. However, this time the accord is between the government of the country and its citizens.
It, therefore, remains to be seen the role that the stimulus will play in India's rise as a global superpower in this century!
- MANISH PANT
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