Fiscal stimulus equivalent to 5% of GDP needed in India

Triple trouble: coronavirus, hunger, and the economy

Sudipto Mundle writes in Mint: A package to restart the economy was announced on 15 April, with some graded easing after 20 April. These supply-side measures are welcome. But we also need to stimulate demand to get the economy going. My initial back-of-the-envelope calculations suggest that without a massive stimulus, the shutdown with a phased reopening could reduce GDP by around 10%in 2020-21.

Providing 2% of GDP extra expenditure for medical equipment and for temporary low-skill health workers, 2% of GDP for income support, and another 1% for extra food allocations would add up to a 5% of GDP fiscal stimulus. West Bengal Chief Minister Mamata Banerjee has recommended a 6%-of-GDP package. The multiplier effect of this 5-6% of GDP stimulus would reduce the recessionary impact of the lockdown significantly.

If GDP declines, it will reduce government revenue even if the existing tax exemptions and concessions are pared. The reduction of non-merit subsidies, totalling 5% of GDP, would at best offset the revenue decline. Hence, a 5-6%-of-GDP fiscal stimulus would have to be financed mainly through extra borrowing. To enable this, the current Fiscal Responsibility and Budget Management limits on Central and state government borrowing will have to be suspended. Under present global conditions, extra borrowings will mainly have to be financed from domestic sources. Such risk-less sovereign debt should be attractive for institutional investors, and its impact on domestic bond yields muted, since private sector demand for funds remains weak. Only in the unlikely event of commercial banks, including public sector banks, declining these bonds should the Reserve Bank of India step beyond its remit and monetize the deficit by directly acquiring them.

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COVID-19 crisis: Stimulus of 5% of GDP needed, says NITI Aayog

From Financial Express: Estimating the economic cost of the Covid-19 epidemic to be huge, the NITI Aayog has proposed a massive fiscal stimulus of over Rs 10 lakh crore or 5% of the gross domestic product (GDP) to address the situation. The package envisaged by the think tank includes income support to the poor, equity support to corporate India, absorption of a portion of NPAs in MSME sector and additional investments in healthcare. While the potential decrease in GDP size itself will raise the Centre’s fiscal deficit expressed as fraction of it to 4% in FY21 from the budgeted 3.5%, the proposed fiscal stimulus could widen it to an unheard-of 10.5% of GDP.

Given that the Centre’s fiscal resources are constrained, the Reserve Bank of India (RBI) may need to finance a portion of this incremental government stimulus, the government think-tank said. The special spending could be ring-fenced within a special Covid-19 budget, rather than as part of the general budget, it added. “Not implementing a concerted stabilisation package in a timely fashion may lead to a far greater damage to livelihoods, the economy and the financial sector, with far worse macro-economic consequences… debt-to-GDP could still rise to 95-100% due to reduced GDP,” the think tank’s CEO Amitabh Kant said in a presentation to the CII.

[...]Niti Aayog cautioned that unemployment risk and social unrest could rise materially with possible displacement of over 3 crore workers. It also warned that solvency risk to the financial system is high if the economic impact is not mitigated in the next 2-3 months. With incremental NPA across banks and NBFCs to be Rs 8.1 lakh crore or 7.3% (of advances) if lockdown continues till mid-May (the government has already extended it till May 3), the NITI Aayog said the core Tier 1 capital of banks will be around 12% or only slightly more than net unprovided NPAs of 10.9%.

[...]The Niti Aayog suggested income support programme of Rs 3.1 lakh crore to 6 crore permanent and contractual workers in the corporate sector and 13.5 crore informal workers and contractors. It also estimated Rs 70,000 crore additional expenditure in healthcare. Among other big fiscal sops, it suggested Rs 2.3 lakh crore capital support (preferably equity) to large corporates in a troubled asset relief programme (TARP) and Rs 1.7 lakh crore credit guarantee fund to absorb likely NPA slippage and credit costs. Certain proposals with no fiscal impact suggested include Rs 2.5 lakh crore RBI forbearance to reduce capital constraints (by rolling back capital conservation buffers) and Rs 1 lakh crore equity support to banks, housing finance companies and NBFCs via a TARP.

Besides the fiscal stimulus, shortfall of Rs 2 lakh crore in tax revenues, Rs 1.1 lakh crore in disinvestment receipts and additional stimulus in the form of payment of governments’ unpaid dues, will push the Centre’s fiscal deficit to Rs 21.1 lakh crore in FY21, the Niti Aayog said. With states’ projected fiscal deficit at 2.6% (to rise significantly as they will spend more and revenues will falter), the combined fiscal deficit of the Centre and states would be 13.1% in FY21, it added. The combined deficit should have been less than 6% in business-as-usual scenario.