Thread by @hemanth2510

Thoughts on tranche 1 of India's "Rs. 20 trillion" ($267bn) stimulus package:

1. The actual stimulus package will be worth Rs. 11.1 lakh crores, but was deceptively announced as 20, including RBI quantitative easing and previous stimulus of ~1.6 lakh crores

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2. Tranche I of the package announced by @FinMinIndia @nsitharaman @nsitharamanoffc, afaik, is worth Rs. 557,000 Cr ($72.4 bn)—2.7% of GDP. So, it isn't really "10% of GDP" being spent right now.

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3. The package does very poorly on actual fiscal expenditure to inject cash into consumers' hands or secure poor. There is nothing targeted at migrants and the poor. The large grain buffer stock is still being held. No cash transfers, MNREGA expansions, Jan Dhan credits, etc.

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Majority of the package is loans/loan guarantees. These will take a while to translate into creating demand which @nsitharaman realizes is key for recovery. Stressed MSMEs getting loan relief will prevent them from going under but not spur hiring and resultant income->demand. 4/

Time matters here. @_CMIE data shows need for immediate assistance for the poor. Guarantees on existing loans or new loans are very ambiguous in how long it'll take for the claimed amount of stimulus to actually show up in the economy.

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It will still spur some demand—50,000 Cr tax relief, 10% EPF to up take-home salary, 50,000 Cr fund of funds for equity injections in MSMEs, NPA/bad loan relief to free up capital for MSMEs, state guarantee on MSME loans will all increase disposable income + MSMEs' investment. 6/

But none of these create immediate security nets for the poor and migrants. What it will do is help avert a crisis from MSMEs shutting down, which is still important because they're the biggest non-agricultural employer in India.

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This should be the focus of tranche II. The actual expenditure associated with this will be *significantly* less than 5.57 lakh crores—good room to spend. So, tranche II should focus on actual expenditure—cash transfers +grain transfers +MNREGA (N=250mn), pension expansions.

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4. Decent work on risk aversion but scope for more. Partial credit guarantee of bearing the first 25% of loss worth Rs. 45K Cr will encourage non-banking finance (NBFCs), housing finance (HFCs), microfin (MFIs) to lend.

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Buying 30K investment-grade debt (not high qual but also not bad debt) from them will somewhat relieve their risk creating room for more risk. But, $9.5bn probably isn't going to do enough for crazyrisk aversion though.

Also, separately, RBI should up the reverse repo rate!

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5. One thing we can be sure of is this will help sustain industrial output of MSMEs. That's still good at preserving jobs, but barely enough to "stimulate" the economy via consumption, spur demand & inflation, etc.

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Most important part of the package is the 3 lakh Cr ($39b) loans to MSMEs. Combined with 45K Cr loan guarantee, 20K Cr debt for NPAs & stressed MSMEs, & 50,000 Cr equity injections, it'll hopefully will prevent many MSMEs to stay afloat, preventing layoffs.

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Quick SUMMARY of the package:
-2500 Cr EPF contributions for 3 months for 72.2L employees
-50,000 Cr fund-of-funds for equity injections in viable but shaky MSMEs
-20,000 Cr subordinate debt for NPAs/stressed MSMEs
-3 lakh Cr collateral-free loans for MSMEs

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-Buy 30,000 Cr investment-grade debt (not high quality) from NBFCs, HFCs, and MFIs
-45,000 Cr partial credit guarantees on MSME loans to NBFCs, HFCs, and MFIs (bear first 20% loss)
-90,000 Cr DISCOM cash injection - a bailout for electricity companies

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-50,000 Cr tax deductions

Disposable income: EPF 10% instead of 12%

Deadline extensions on FY2020 taxes, real estate registration, govt contractors

Production
-Disallow govt. from getting global tenders <200Cr
-E-market facilities
-Classify more companies as MSME

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@threadreaderapp unroll

*reduce the reverse repo rate