Government could borrow directly from RBI to finance COVID-19 relief package: CARE Ratings

Apart from market borrowing to finance the Rs 20-lakh-crore economic relief package announced by Prime Minister Narendra Modi on May 12, the government could also look at borrowing directly from the Reserve Bank of India (RBI).

"The other option that's legally not permitted today is borrowing directly from the RBI. But they can always change that (the law) and allow it to happen," said Madan Sabnavis, Chief Economist, CARE Ratings.

India's central bank hasn’t directly bought sovereign debt as a law barred the practice that came into effect in April 2006.

"The advantage of borrowing directly from RBI is that it won't upset the market. But at some point, RBI has to download whatever securities it is buying from the government into the market but that'll probably happen over a period of time," Sabnavis said.

On May 12, PM Modi announced the second economic relief package to tackle the fallout of COVID-19 pandemic. On May 13, FM Nirmala Sitharaman gave the details of the first tranche of the package.

"It (borrowing) is one of the ways we are also expecting to finance the Rs 20 lakh crore," Sitharaman said during a press briefing.

On May 8, the government had announced an increase in the estimated gross market borrowing for FY 2020-21 to Rs 12 lakh crore from Rs 7.80 lakh crore as per Budget Estimates (BE) 2020-21.

The government had said the revision in borrowings was necessitated on account of the COVID-19 pandemic.

The minister made a host of announcements for the micro, small, and medium enterprises (MSMEs). The minister announced a Rs 50,000-crore equity infusion through fund of funds for MSMEs.

MSMEs are facing a severe shortage of capital. The fund of funds will be set up with a corpus of Rs 10,000 crore.

"The fund of funds will be operated through a mother fund and a few daughter funds. The government will provide equity funding for MSMEs with growth potential and viability," said Sitharaman.

Sitharaman also announced a Rs 30,000- crore special liquidity scheme for non-banking finance companies (NBFCs), housing finance companies (HFCs) and micro-finance institutions (MFIs).

"Yesterday, whatever announcements were made, there are very few compulsions on the part of the government to spend money. Most of it is coming through the banking system or as contingent liabilities of the government. So in case they default, then there would be something for the government to fear only after a period of time," Sabnavis said.

The government announced an equity infusion for MSMEs through a fund of funds having a corpus of Rs 10,000 crore and Rs 20,000 crore sub-ordinate debt for stressed businesses.

"Rs 20,000 crore for subordinate debts, could possibly be from the budget. So if we look at the actual amount of money the government is spending, it won't be more than Rs 30,000 - Rs 40,000 crores, if we take into account the provident fund measures etc. That's keeping it on a higher side, it could be much lower," Sabnavis said.

For the subordinate debts, the government might facilitate it by asking the Small Industries Development Bank of India (SIDBI) to provide.

"Facilitate meaning they'll let SIDBI do it, so possibly it'll be coming from SIDBI and not the government," Sabnavis said.

This Rs 20 lakh crore figure, as the PM said in his speech on May 12, includes the previous Rs 1.7 lakh crore stimulus package, various government announcements for key sectors and steps taken by the RBI since the lockdown began on March 24 midnight. These earlier measures now together amount to Rs 7.79 lakh crore of the complete package.