Saturday, May 23, 2020

Actual fiscal stimulus in India

On 12 May 2020, Prime Minister Narendra Modi announced a special economic package worth INR 20 lakh crore (INR 20 trillion or about USD 267 billion), which taken together with the earlier announcements by the government and RBI is equivalent to about 10% of GDP, with a focus on a self-reliant India (Atmanirbhar Bharat). On 26 March 2020, the government had announced an economic relief package (PMGKP) worth INR 1.7 lakh crore while the RBI offered liquidity support of INR 3.7 lakh crore in March and INR 2 lakh crore in April. 

The Atmanirbhar Bharat Abhiyan (ABA) has five pillars and will focus on land, labor, liquidity, and laws.
  1. Quantum jump in economy 
  2. Modern infrastructure
  3. Technology-driven system/reforms
  4. Vibrant demography
  5. Strong demand 
The main idea is to build back better so that the eventual economic recovery is better than before and India is better positioned to respond to any future health or natural crises. Some of the measures (such as direct cash transfers and food subsidy) are designed to negate the effect of crisis such as COVID-19. The reform measures will not only enhance efficiency across sectors, but also ensure quality and push India towards a self-reliant economic regime. 

The government is aiming for bold reforms in supply chain in agriculture, rational tax system, simple and clear laws, competent human resource, and a strong financial system. Make in India campaign will benefit from these reforms as the emphasis is on meeting demand locally but competitively. The expectation is that these measures will lead to the emergence of confident and resilient India that depends on its strengths and also integrates with the global economy. 

Following up on PM Modi’s announcement, on 13 May 2020, Finance Minister Nirmala Sitharaman, provided details, in five tranches (Part 1, Part 2, Part 3, Part 4, and Part 5), of the comprehensive package. 

The extra fiscal spending will be a fraction of INR 20 trillion as most are related to providing or leveraging liquidity, providing guarantees, and regulatory tweaks. The guarantees and backstops increase contingent liabilities on government, to the extent they are utilized. The following table gives an overview of the estimated fiscal cost or stimulus (1 USD = INR 75).

Self-reliant India movement economic package
Sectors
INR crores
USD billion
Fiscal stimulus or cost
Before May 13
Revenue loss due to tax concessions since 22 March
7,800
Tax relief
PMGKY
          170,000
22.7
102,600
Emergency Health Response Package
15,000
2.0
15,000
Total
192,800
25.7
Tranche 1-For businesses including MSMEs
MSMEs
Emergency collateral-free working capital facility
          300,000
40.0
Subordinate debt for stressed MSMEs
20,000
2.7
4,000
MSME Fund of Funds
50,000
6.7
10,000
EPF
Extend EPF support for 3 more months
2,500
0.3
2,500
Reduction in employer & employee contribution to 10% from 12% for 3 months
6,750
0.9
Tax relief
NBFCs/MFIs
Special liquidity scheme for NBFC/HFC/MFIs
30,000
4.0
Partial credit guarantee scheme
45,000
6.0
20% of loss if incurred
DISCOMs
Liquidity injection
90,000
12.0
Tax relief
TDS and TCS reduced by 25% for FY2021
50,000
6.7
Tax relief
Total
          594,250
79.2
Tranche 2-For poor, including migrants and farmers
Migrant workers welfare
Free food grains supply to migrant workers for two months
3,500
0.5
3,500
Farmers and small businesses
2% Interest subvention for 12 months for Shishu MUDRA loanees
1,500
0.2
if incurred
Credit facility for street vendors
5,000
0.7
if incurred
Extension of Credit Linked Subsidy Scheme under PMAY (Urban)
70,000
9.3
if incurred
Additional emergency working capital for farmers through NABARD
30,000
4.0
if incurred
Concessional credit to PM-KISAN beneficiaries
200,000
26.7
if incurred
Total
310,000
41.3
Tranche 3-Formalizaiton of Micro Food Enterprise (MFE)
Strengthen infrastructure logistics and capacity building
Agri Infrastructure Fund
100,000

100,000
Formalizaiton of Micro Food Enterprise (MFE)
10,000
10,000
Pradhan Mantri Matsya Sampada Yojana (PMMSY)
20,000
20,000
Animal Husbandry Infrastructure Development Fund
15,000
15,000
Promotion of herbal cultivation
4,000
4,000
Beekeeping initiatives
500
500
TOP to TOTAL
500
500
Total
150,000
20.0
Tranche 4-New horizons of growth- Structural reforms in eight sectors
Social infrastructure VGF
8,100
8,100
Total
8,100
1.1
Tranche 5-Government reforms and enablers
MGNREGS
40,000
40,000
Total
40,000
5.3
RBI measures-actual
801,603
106.9
Grand total
2,096,753
279.6
335,700
Share of total
16.0
FY2020AE NGDP
2,998.6
22489420
Share of NGDP FY2020AE
1.5

When the size of fiscal stimulus is expressed as share of GDP, then one confusion is which year’s nominal GDP to use. If folks use FY2020 advanced estimate of nominal GDP, then it may not be correct because nominal GDP is sure to decline as the advance estimate was released before COVID-19 pandemic. But then, if folks revise FY2020 nominal GDP downward then the size of fiscal stimulus as a share of GDP will increase compared to FY2020 AE. If folks are using FY2021 nominal GDP forecast, then the variability in size of fiscal stimulus is unsurprising. Furthermore, note that some of the fiscal stimulus may not be realized in FY2021 itself. So, expressing fiscal stimulus as a share of GDP is not uniform across estimates by different organizations. That said, most of the estimates are between 1-2% of GDP. 

While some argue that the economic package is inadequate to address the economic challenges, other counter that it is appropriate for the time being