Rs 20 Lakh Crore Economic Package With Little Government Spend
A traffic light stands in front of the South Block of the Central Secretariat buildings, left, which houses the Prime Minister’s Office and the Ministries of Defence and External Affairs, and the North Block, right, which houses the Ministries of Finance and Home Affairs, as the Presidential Residence sits in the background in New Delhi, India. (Photographer: T. Narayan/Bloomberg)

Rs 20 Lakh Crore Economic Package With Little Government Spend

The government’s Rs 20 lakh crore economic support package, intended to help the economy tide over the Covid-19 crisis, will involve a very small amount of direct government spending, said economists. As such, it may not be adequate to help push up demand in the economy.

Finance Minister Nirmala Sitharaman detailed the package in five tranches, the last of which was announced on Sunday. The package included liquidity measures already announced by the Reserve Bank of India, loan guarantees and increased spending on some areas such as the rural jobs guarantee programme.

The largest part of the package is over Rs 8 lakh crore in liquidity measures announced by the RBI. The government has also decided to provide 100 percent guarantee to Rs 3 lakh crore in small business loans but the immediate outgo on that scheme will be limited. In addition, it has raised the allocation to the Mahatma Gandhi National Rural Employment Guarantee Scheme to over Rs 1 lakh crore. Besides that, little direct support has been provided to businesses facing a sudden stop in activity.

The package may fall short of mitigating the near-term challenges for some businesses, but it is better designed to improve India’s medium-term growth potential, said Sonal Varma, chief India economist at Nomura Global Market Research.

The government has aimed for maximum bang for minimum buck, with most of the relief either regulatory in nature or reflected in its contingent liabilities rather than explicit budgetary support. Meanwhile it has used the cover of the COVID-19 crisis to plough through long pending, politically sensitive reforms. 
Sonal Varma, Chief India Economist, Nomura Global Market Research

What’s The Additional Government Spend?

Most economists were watching details of the package to judge the incremental support the economy would receive as a result of higher government spending. With all five tranches detailed, the increased spending is minimal.

“The estimated fiscal impact on the budget from the five set of announcements made will be only Rs 1.5 lakh crore or 0.75 percent of GDP,” said Rahul Bajoria, chief India economist at Barclays Plc.

If the additional expenditure under the Rs 20 lakh crore package is added to the previously announced Pradhan Mantri Garib Kalyan package and the Rs 15,000 crore allocated for strengthening health infrastructure, the total would be around Rs 2.7 lakh crore or 1.2 percent of GDP.

Pranjul Bhandari, chief India economist at HSBC Securities, in a note said that the fiscal cost of the entire package, including announcements made by the government in March, will be Rs 2.13 lakh crore or 1 percent of GDP. “The impact of the 10 percent of GDP package on the fiscal deficit is small,” Bhandari said. She added that while a few schemes will help support the economy in the short term, most will have a medium term impact.

For the short run, the following schemes seem to be most effective -- rise in MGNREGA outlays, free food grains for the needy, loan guarantees for MSMEs and NBFCs, and breather from the IBC process. If implemented well, the following can prove powerful over the medium term -- passing laws to revitalize agriculture marketing, implementing commercial mining policy, and privatising public sector enterprises.
Pranjul Bhandari, Chief India Economist, HSBC

When asked about the fiscal impact of the relief measures, particularly on this year’s budget, Finance Minister Sitharaman did not give a clear answer but said the government is making sure the money goes to the right place.

“I’d like you to look at where this money is going, whose hand it is going, for whom it is going, its going for asset creation, to create employment, to not let companies shut. We are making sure money goes to the right place,” Sitharaman said. “We are not splurging, we are spending responsibly.”

Will It Help Revive Demand?

The economic package announced by the centre is prudent and consists of measures aimed at helping the economy in the medium to long term, said NR Bhanumurthy, professor at National Institute of Public Finance and Policy. However, there should have been more measures to revive demand in the rural areas in the short term, he added.

The one step that will have a direct impact on demand is the increase in MGNREGA allocation to a little over Rs 1 lakh crore. This will help in generating work equal to 300 crore person days in total and address the employment needs of migrant workers, Sitharaman said.

However, even this record high allocation may not be enough.

Partha Chatterjee, professor at Shiv Nadar University, said that more funds, over the increased allocation, would be needed since more and more migrant workers are returning to villages. As the daily wage has been increased from Rs 182 to Rs 202, there would be about 28 percent increase in person-day that can be supported this year, Chatterjee said in an emailed statement. “If the trend of higher enrollments under the scheme continues, which is more likely as migrant workers are returning to villages, probably more funds would be needed under the scheme.”

Beyond the rural jobs guarantee scheme, economists see little immediate support to demand.

“As is clear from the fiscal math, the direct cash outgo to support immediate domestic demand remains contained. But as the lockdown eases (gradually), postponed consumption demand and inventory restocking demand could provide a growth push,” said HSBC’s Bhandari.

Madhavi Arora, economist at Edelweiss Securities, said that while medium-term reforms are imperative, a more rigorous direct fiscal push is needed to create immediate effective demand in the economy. “To gauge incremental fiscal and growth impact, we need to see if the budgeted revenue expenditure growth of 12 percent is maintained, augmented, or merely rejigged to adjust for the additional Covid spending,” Arora said.

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