Year 2020 in flashback: Key decisions that drove economy and those that failed

Divakar Vijayasarathy 

2020, will be remembered as one of the fascinating stories of mass cooperation in human history, where the entire world came together to fight an invisible enemy, rather successfully. India began the year with a jolt, GDP growth plummeting to 4.2% (lowest in the past decade) and the advent of COVID couldn’t have been timed better for a tailspin. The nation went into a full lock down, cities and malls became zombie towers and we saw population being imprisoned enmasse at homes in fear. However, we need to give it to the Government for having managed the pandemic well and positioning India as one of the better placed jurisdictions to come out stronger.

India’s economy shrank by a record 24% in Q1, unseen even during periods of World War, thanks to stringent nation-wide lockdowns. However, we have bounced back strongly since then. If RBI’s predictions hold good, we should be looking at a positive Q3 and Q4. A series of actions and restraints, during the year made this outcome possible. While some of these have had immediate impact (boundaries), few have been structural with longer term implication (singles and twos) and few were off target (misses) from the intended impact. As a cricket loving nation, if we are to put the highlights of our 2020 innings, the following shots stand out:

Boundaries: 

• Controlling fiscal deficit: When the whole world was clamouring for higher fiscal stimulus, the Government restrained the temptation to print and spend ensuring that the economy shall find its way to resilience and eventual prosperity. India’s effective COVID stimulus is estimated around 2% of its GDP as compared to 13% in US, 21% in Japan, 14% in Australia, 12% in Brazil and 7% in China (statista.com), making it one of the least stretched countries post COVID.  

• Loan Moratorium: Considering the sudden pause of cashflows to businesses, the RBI permitted a loan moratorium (extending to 6 months) thereby easing the cash flow commitments. The facility was availed by more than a third of borrowers (including 78% of MSME borrowers) ensuring business continuity and protecting jobs across sectors.

• Emergency Credit Guarantee (ECG) Scheme: Government announced the ECG scheme to provide relief to the business, with additional working capital finance of 20% of existing limits, in the form of a Term Loan at a concessional rate of interest. The limit was fully backed by a sovereign guarantee thereby providing a total liquidity of Rs. 3 lakh crores to more than 45 lakhs MSMEs. This was a master stroke wherein the Government leveraged its balance sheet for a contingent liability instead of a real obligation, which was the case with most other jurisdictions globally. 

Singles and twos:

• Production Linked Incentive (PLI) scheme for Electronic, Medical devices and Pharma Industry: Aatma Nirbhar or self-sufficiency across critical sectors is one of the key objectives of this Government and three sectors were initially identified for the purpose. Bureaucratic delays have always plagued entrepreneurship zeal with approvals taking as much as 1-1.5 years for new projects. In this backdrop, the PLI scheme was launched wherein applications will be cleared within 90 days and shall also be eligible for financial incentives (Rs. 50,000 crores in total). The first window for the pharma scheme received 215 applications from 83 firms and is one of the biggest policy successes for the year. Under the electronics scheme, out of 22 applications, 16 have already been approved comprising of global giants like Foxconn, Samsung, Wistron, etc.

• Faceless assessments: This is one of the revolutionary steps which would have far reaching impact on ease of operations and transparency in the country. The National e-Assessment Centre has been empowered as the main gateway for communication between the taxpayers and tax authorities. India is the first large jurisdiction in the world to have adopted such a mechanism for assessment. As of Sep 20, nearly 60,000 cases have been taken up for faceless assessments and more than 8500 cases have been disposed off without additions. 

• Abolition of Dividend Distribution Tax (DDT): This has been one of the longstanding demands of investors. Apart from DDT, dividends above Rs. 10 lacs were taxed in the hands of the investors. With the abolition of DDT both these issues have been addressed. Further the surcharge on divided has been restricted to 15% as a relief to the HNIs. The government is expected to forego Rs. 25000 crores of revenue in the interest of encouraging capital investments. 

Misses:

Airline Industry, completely ignored: The aviation sector did not receive any comprehensive bailout package from the Indian Government. Measures such as loan moratorium, privatisation of six more air ports, freeing up more air space for civil, etc do not have any direct impact for the current losses of the industry. Countries like Germany, United States, UK, Canada, Singapore, UAE and Hong Kong announced packages in the form of financial assistance for payroll expenses and other operations or soft loans of funding in exchange of a minority stake in the airlines. Indian airlines contended that the Rs.1000 crores of indirect relief was insufficient, as they are estimated to lose revenues to the tune of $11.61 billion (vs 2019) impacting more than 3 million jobs.

MSME Udayam scheme, exclusion of traders: Traders have been excluded from the purview of MSME definition, consequently eliminating nearly 2.3 crore entities (36%) from the landscape. Scheduled commercial banks had sanctioned limits of nearly Rs. 11.5 lakh crore to 1.25 crore traders (whole sale and retail) (Mar 18), all these limits would now have to be reviewed in terms of pricing and eligibility in the absence of priority sector tag.

Ambiguity in Debt Restructuring:  RBI, on the basis of Kamath Committee report, announced a one-time special window for lenders to restructure loans. However, the recommendations were too broad with financial metrics which were difficult to fulfil even under stable economic conditions.  As per RBI’s banking trends report, 39% of scheduled commercial bank loans were under moratorium when it ended in August, which is roughly around Rs. 40 lakhs crore. However, considering the ambiguities and impracticality of the restructuring norms, borrowers to the tune of only Rs. 2 lakh crores have opted for restructuring.

As observed, the year was a mixed bag for policy making however what is encouraging is that the boundaries and runs are higher than misses (the list is endless). Most of the decisions were taken without access to the luxury of history as circumstances were unprecedented. Policy making is a game of options and outcomes, and we must say, with the benefit of hindsight, options with the desired outcomes have been predominantly chosen. Despite good intentions, governments are judged by their outcomes and going by this yardstick, the current dispensation seem to have passed the muster.

Divakar Vijayasarathy is Founder and Managing Partner of DVS Advisors LLP. Views expressed are the author’s personal.