While individual ministries and departments are making a strong case for a large-scale fiscal package, there are indications from other quarters for a need to pause, calibrate the impact and then announce any intervention.

AS the Covid pandemic and the prolonged lockdown batter all sectors of the economy, the government, sources said, is working on a rescue package that, for now, may address the needs of the micro, small and medium enterprise (MSME) segment rather than the larger corporate sector.

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More than six meetings have been held at the Prime Minister’s Office — including Thursday’s with Finance Minister Nirmala Sitharaman and Commerce and Industry Minister Piyush Goyal — to discuss the scope and quantum of the second fiscal package.

But what has held back an announcement is the open-endedness of the stimulus being pushed by sections within the government.

“The Prime Minister has been asking ‘searching’ questions. What probably weighs in his mind is the aftermath of the massive stimulus the government imparted following the 2008 global financial crisis. Few large industrial groups made the most of the monetary and fiscal stimulus, built huge and unsustainable balance sheets, left banks with large NPAs, and this also led to high inflation,” said a source who did not wish to be named.

The political leadership is keen to avoid this.

While individual ministries and departments are making a strong case for a large-scale fiscal package, there are indications from other quarters for a need to pause, calibrate the impact and then announce any intervention. The Prime Minister is worried about the lack of a “sunset clause” in stimulus provisions.

Compared to many developed economies, many analysts argue that India has done much less on the fiscal side while the RBI has been proactive in monetary easing.

“He would rather have it more focused. MSMEs, health care, financial sector, and the poor and vulnerable – these will remain the target segments,” another official said.

Sources involved in discussing the second fiscal package said that a consensus seems to be emerging that within industry, MSMEs have not gained much and continue to feel the pain despite measures announced by the Finance Ministry in its first package and steps taken by the Reserve Bank of India so far.

Sources said MSMEs may be supported through a fund that carries a government guarantee. “The government could also provide a direct guarantee against fresh loans to units in the sector so that they can raise funds from banks to stay solvent,” said a source, not wishing to be named.

Officials indicated there is a clear realisation that there exists limited fiscal space for a big package of the order of the one extended in 2009.

MSME minister Nitin Gadkari had, on April 24, indicated the possibility of setting up a Rs 1 lakh crore revolving fund for MSMEs. It is learnt that directions have been given to the PSUs to settle bills raised by MSMEs to ensure the latter’s working capital requirements are met.

The government’s plan is to ensure higher working capital limits, clearance of any pending dues and credit guarantee against loan losses to MSMEs so that banks lend to them.

While a credit guarantee fund for MSMEs is already run by SIDBI, the new proposal is the government providing a direct guarantee against fresh loans to a certain extent.

This could also be done through a government-backed special purpose vehicle which is expected to nudge banks to boost lending to MSMEs and lower-rated companies, for which funding has been choked because of risk-averse banks.

Officials indicated there is a clear realisation that there exists limited fiscal space for a big package of the order of the one extended in 2009.

For the corporate sector as a whole, a package, if any, will likely be discussed well after the lockdown is lifted and issues specific to individual sectors such as automobiles or aviation get flagged.

There is a view that large corporates got benefits from the corporate tax cut last September when rates for domestic companies were reduced to 22 per cent from earlier rate of 30 per cent.

Moreover, the upcoming salary payment position of companies in early May, when April salaries would be disbursed, is also being tracked closely to gauge signs of distress.

As part of the stimulus, the government has also finalised plans to set up a credit enhancement company to support lower-rated infra projects – a proposal that has been in the works some time.

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The proposed company, for which inter-ministerial discussions have been completed, will provide partial guarantee against loan losses to lenders, enabling the borrower to enhance its credit ratings for infra projects. “This company will de-risk the banking sector, enable more funding for new projects of nearly Rs 3 lakh crore from banks and the corporate bond market,” the official said.

While the government has so far tried to remain within the additional 0.5 percentage point space provided under the Fiscal Responsibility and Budget Management (FRBM) laws, there is a realisation within government that more needs to done.

A relaxation of the fiscal deficit target by 1.5 per cent of GDP could generate around Rs 3.5 lakh crore that can be used to provide an economic stimulus, according to a recent CRISIL research report.

Compared to many developed economies, many analysts argue that India has done much less on the fiscal side while the RBI has been proactive in monetary easing.

India’s fiscal package of Rs 1.7 lakh crore, comprising direct income transfer and other measures, is only 0.7 per cent of GDP, compared with 2.5 per cent in China, 8.9 per cent in the US, 7.9 per cent in South Korea and 6.6 per cent in Brazil, the report said.

The Finance Ministry has so far not responded to queries seeking comments for the story.