New Delhi: The headline number from India’s economic package to combat the impact of Covid-19 is Rs 21 lakh crore, but the actual fiscal hit will only be around Rs 2-2.5 lakh crore, according to economists and ThePrint’s own calculations. The figure of Rs 2-2.5 lakh crore comes to around 1 to 1.2 per cent of India’s GDP.
The package, the last part of which was announced by Finance Minister Nirmala Sitharaman over the last five days beginning Wednesday, includes all the measures announced by the government and the Reserve Bank of India to provide a reprieve to various sectors of the economy, which have been reeling since the beginning of the Covid-19 lockdown on 25 March.
A substantial part of the package goes towards providing credit and liquidity support to individuals and businesses, with cash transfers and free food grains to the most vulnerable and needy coming to around Rs 1 lakh crore.
Asked about the total fiscal impact of the economic package and how the government will finance it, Sitharaman Sunday said at this time, it is important to look at where this money is going.
“I want you to look at where this money is going. It is going into asset creation, into meeting people’s daily spending requirements, to prevent companies from shutting down, to ensure people don’t lose their jobs,” the finance minister said. “We are not splurging, we are being responsible.”
Due to the Covid-19 pandemic and the lockdown enforced to curb its spread, India is facing a sharp contraction in revenues, along with a sharp increase in expenditure. This has exerted pressure on government finances and the fiscal deficit, with the government announcing that it will borrow an additional Rs 4.2 lakh crore from the market.
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The measures and their fiscal cost
The RBI announced a series of measures to provide liquidity support to different sectors, including to the stressed non-banking finance companies, mutual funds and housing finance companies. According to the government, these support measures account for over Rs 8 lakh crore of liquidity support. But there are no fiscal implications.
The government unveiled the Rs 1.7 lakh crore PM Garib Kalyan package in the last week of March to give cash transfers and free food grains to the poor and vulnerable. The fiscal hit from these measures is estimated to be around Rs 1.1 lakh crore.
Beginning Wednesday, Sitharaman unveiled the second part of the government’s package in five tranches.
The first set of announcements, worth nearly Rs 6 lakh crore, were aimed at providing relief and improving credit flow to micro, small and medium enterprises (MSMEs), non-banking finance companies and housing finance companies. The first tranche also looked at increasing the cash-in-hand for organised sector workers and employers.
Economists’ estimation of the fiscal hit of these measures varies from Rs 20,000 crore to Rs 50,000 crore due to support measures for MSMEs and firms.
The second tranche of announcements focussed on providing relief to migrant labourers, farmers, small traders and street vendors, totalling Rs 3.1 lakh crore.
These announcements are expected to have a fiscal impact of only Rs 16,000 crore on account of free food-grain distribution to migrant labourers, and credit line to street vendors.
The third tranche dealt with strengthening farm infrastructure and bringing in agricultural reforms. The support amounting to Rs 1.5 lakh crore will see a cash outgo of only Rs 6,000 crore from the Budget.
The fourth tranche announced Saturday included a series of structural reforms across sectors like coal, aviation and defence. The proposal to provide viability gap funding for social infrastructure would lead to an outgo of Rs 8,100 crore from the Budget.
Sunday’s final tranche of measures includes a sharp 65 per cent increase in allocation to the rural jobs guarantee scheme MGNREGA. The additional Rs 40,000 crore allocation will be a direct cash outgo from the budget.
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Varying estimates
D.K. Srivastava, chief policy adviser at EY India, said the package accounts for around 9.8 per cent of the GDP for the 2020-21 financial year.
“Only about 10 per cent of this stimulus can be traced as direct additional budgetary cost to the central exchequer. Nearly 5 per cent of the stimulus relates to already budgeted expenditures,” he said in a note, adding that though most of the measures are supply-side measures, the additional Rs 40,000 crore allocation to MGNREGA is a demand-side boost.
Rahul Bajoria, chief India economist at Barclays, estimated that the actual fiscal impact of the announcements made over the last five days is Rs 1.5 lakh crore. “We continue to believe that the government may end up with a fiscal deficit of close to 6 per cent of GDP during FY20-21,” he said in a note.
Madhavi Arora, lead economist at Edelweiss Securities, estimated that the total overall direct fiscal policy response to the Covid-19 pandemic stands at 0.8 per cent of GDP.
Arora added that while “medium term reforms are imperative, a more rigorous direct fiscal push is needed to create immediate effective demand in the economy”.
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Why liquidity support measures are ‘part of package’
India has chosen to follow in the footsteps of countries like the UK that included credit support provided to firms as part of the calculations of the total size of the package. The UK’s 350-billion-pound package also provided loan support to businesses, along with a guarantee in case of a default.
At Friday’s press conference, the government defended the way the economic package is calculated.
“Most countries’ packages… the way they are being reported including in the international press… are a combination of actual fiscal outgoes and liquidity provisions,” said T.V. Somanathan, Expenditure Secretary. “It is not that only we are counting it this way. Most of the countries are counting it this way.”
Without mentioning the UK, Somanathan explained that its package is about 15 per cent of its GDP, of which 14.9 per cent of the GDP is liquidity support.
Tarun Bajaj, Secretary, Department of Economic Affairs, pointed out that the government is disclosing what is liquidity and what is going from the Budget. “The important thing is that liquidity is also helping the stressed sector in trying to come out from the stress,” he said.
At a digital Off The Cuff conversation with ThePrint’s Editor-in-Chief Shekhar Gupta last month, India’s Chief Economic Advisor Krishnamurthy Subramanian had cautioned that the size of the package of other countries is not as high as they are stating. Using the UK example, he had pointed out that the “cost” of the 350 billion-pound package will only be around 35 billion pounds.
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