Atmanirbhar Package 3.0 To Entail Near-Term Spend Of Up To 0.6% Of GDP
India’s fiscal deficit for 2020-21 is now seen rising to 13% of GDP from 12.4% earlier.
The latest stimulus measures will entail a near-term spend of about 0.5-0.6% of India’s GDP, with some of it likely to spill over into the next fiscal, according to economists. And they see benefits accruing over the medium term, with limited impact in the current financial year.
Finance minister Nirmala Sitharaman announced 12 new measures to revive the economy under the third instalment of Atmanirbhar Bharat. The measures, ranging from employment creation and agricultural support to capex creation, will cost the exchequer an estimated Rs 2.65 lakh crore, Sitharaman said at the end of her presentation on Thursday.
Rahul Bajoria, chief India economist at Barclays, however, said the measures are likely to cost the exchequer Rs 1.19 lakh crore, estimated at 0.6% of the country's gross domestic product.
Excluding the production-linked incentives, the fresh expenditure that the new announcements entail is likely to cost Rs 1.2 lakh crore, according to Aditi Nayar, principal economist at ICRA. While the measures are expected to boost sentiment and bolster the economic recovery in the second half of the ongoing financial year, the benefit of some of the measures may manifest into a growth boost only over the medium term, Nayar said.
The largest chunk of expenditure under the latest tranche of measures announced was Rs 1,45,980 crore for production-linked incentives to 10 more sectors in a bid to boost manufacturing. But this is in the nature of revenue foregone over five years.
Devendra Pant, chief economist at India Ratings & Research, explained that the government is essentially providing tax benefits to projects that still don’t exist. But if firms are set up and start production, he said, they will help reduce import dependency for these sectors, create employment opportunities, help revive consumption in the economy and eventually increase tax flows.
The government has allocated Rs 65,000 crore for fertiliser subsidies under the stimulus. But fertiliser subsidies, too, are generally rolled over, Pant said. As such, the measure will help reduce receivables from the balance sheets of fertiliser companies, reducing their working capital requirements, he said.
Notwithstanding the reforms and stimulus announcements so far, Nayar said that government spending has contracted on an annual basis in Q2 FY21. “We hope to see this turnaround in the ongoing quarter to help solidify the economic revival."
The Ministry of Housing and Urban Affairs, which runs the Pradhan Mantri Awas Yojana, has spent only 30% of Rs 15,001 crore allocated to scheme in the Union Budget as of September 2020, according to data from the Controller General of Accounts. Only four months of the year remain in which to spend the balance and the additional allocation of Rs 18,000 crore made in this third round.
The Ministry of Rural Development that runs the MNREGA employment program, and has received an additional Rs 10,000 crore, remains the only ministry to have overrun its budget allocation.
Other ministries relevant to the schemes announced continued to show slower expenditure growth compared to the previous year.
Housing and infrastructure development are good initiatives; however, it will be important to see whether these projects can be completed in remaining time of FY21, said Pant.
The Fiscal Outlook
While there is no indication that the borrowing programme will remain unchanged at Rs 12 lakh crore, estimated at 6% of the GDP, Barclays raised its forecast for the consolidated deficit to 13% of the GDP for FY21, from 12.4% earlier. Of this, it expects the central government's fiscal deficit to rise to 7% of the GDP from 6.4% earlier, Bajoria said.
The fiscal support package so far has had a cash outgo of 1.7% of GDP. With Thursday's announcement, it is likely to go up to close of 2% of GDP, said Pranjul Bhandari, chief India economist at HSBC.
“We forecast the central government fiscal deficit to widen to 8.2% of the GDP in FY21 versus 3.5% budgeted, led more by a shortfall in tax revenues than a rise in expenditure," Bhandari said. "The risk to our forecast is that the deficit comes in a shade narrower, given weak expenditure trends.”
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According to Bhandari, while fiscal stimulus has been small, monetary policy has been extremely accommodative. “There has been a meaningful pick-up in activity over the last few weeks. Some of this could be reflective of festival-led and pent-up demand,” he said. “In our view, urgent reforms are needed for this uptick to sustain.”