Boosting the economy

The first part of India’s ₹20 lakh crore economic package was announced on Wednesday — the second, if one factors in the relief to the poor and marginalised announced in late March, and the Reserve Bank’s announcements in March and April — and it provides some indications on what the government hopes to achieve. That the Narendra Modi government would focus on micro, small and medium enterprises (MSMEs) was a given. Its first package focused on individuals at the bottom of the pyramid. It was only natural that that it would then turn its focus to enterprises at the bottom of the pyramid. The package offers small enterprises easy credit, guaranteed by the State; support for those weighed down by loans they can’t service; and an equity infusion. It also redefines them, removing a disincentive to grow (and be competitive), and reserves business for them by not allowing global tenders for government purchases less than ₹200 crore. All of these — credit, competitiveness, and an emphasis on the local — flow from the prime minister’s speech on Tuesday.

The extension of three more months (June, July, August) provident fund support for businesses and workers — in companies employing fewer than 100 people, with 90% earning less than ~15,000 a month — is effectively a 24% wage support to small enterprises, and the reduction in the contribution of both employees and employers in other companies to the provident fund (from 12% to 10%) will provide ₹6750 crore of liquidity, split equally between companies and employees. Liquidity was another theme in the prime minister’s speech on Tuesday. The measures also tackled the issue of a looming crisis in the shadow-banking sector by providing it with a fully guaranteed ₹30,000 crore special liquidity scheme, and a ₹45,000 crore partial credit guarantee scheme. There was also a focus on real estate and power, both extremely stressed sectors.

Finally, in an attempt to put more money in the hands of people, the government announced a 25% reduction in tax deducted or collected at source, but only for non-salary payments. This covers everything from interest on fixed deposits to dividend and rent payments, and will result in ₹50,000 crore more flowing into the system (which people will hopefully spend). This is perhaps the best directed part of the measures announced on Wednesday, and the only one that will help the middle class. More such measures, that either cut tax, or actually transfer cash to individuals and businesses, will be needed to spur demand and get the wheels of the economy chugging.