The Math of The Economic Package

India has been in lock down for over 2 months with limited economic activity. The Reserve Bank of India yesterday has hinted that the GDP growth for the current financial year can be negative. Many rating agencies has predicted negative growth rate for India for the current financial year while some has predicted a low positive growth which also is the lowest in almost 40 years. The government of India and the Reserve Bank of India has announced host of economic packages during this lock down period to boost the economy so that the dismal impact on economy can be controlled for. Here is a overview of the packages announced since the lockdown started from March 25th.

So a total of 10.3% of GDP was announced as a package. Now this has both monetary and fiscal components. Let us analyse into this components of the package.

Components of Economic Package

The total package announced by the government has a significant portion which provides additional liquidity and credit opportunities to the market. So these measures means that banks and other financial institutions now can lend more. So the money allocated in terms of liquidity and credit measures will be effective if the credit offtake from banks and NBFCs match the additional liquidity provided by measures taken by the RBI and the government in terms of providing additional liquidity and credit. Now both of these measures comprise almost 80% of the total economic package announced.

There is a commitment of creating new funds as part of this package like the agriculture infrastructure fund, animal husbandry funds and so on. Then there are measures of tax reduction, providing food or cash to people, health related measures, some of them has immediate impact or some may have longer term impact. There has been a lot of debate around what is the exact portion of fiscal measures of this economic package.

Fiscal Measures of the Economic Package

There has been some amount of variation in terms of measuring the exact government expenditure or fiscal commitment announced in the economic package. Different expert organisations have come up with their view on the estimate of fiscal contribution committed in the economic package as a percentage of GDP. The estimates ranges from 0.7% to 1.5% of GDP. Indian National Congress in its press conference puts this at 1.6%. Why do we see this variation?

If one looks into all the components of the package then the total government commitment comes to be 1.8% of GDP. Now there has been debate on some of the components of the fiscal measures for which we see such variation.

• TDS relief: The consensus on this among all tax experts is that though this might give some immediate relief but the tax liability will remain the same and hence this should not be considered as part of fiscal measure.
• Government Commitment to Funds : The consensus view here is that these are off-budget items and the contribution of the government in these funds is not mentioned. Hence this is not considered as part of fiscal measure.
• Government Contribution to Credit: Out of the total 3.5% of GDP allocated for additional credit, there is a government commitment of 0.1% of GDP. Now there is an argument that since providing credit does not mean any immediate disbursal of funds and this will only kick in when people takes loan. So this money will not be in the market in the short to medium run. Hence some of the organisations have not considered this as part of fiscal measure.
• Already Budgeted measures: Some of the measures taken as a component of the first package announced in 26th March were already budgeted as part of the budget for Financial year 2020-21, tabled in the parliament on 1st February, 2020 and is not a new allocation for covid relief like the commitment in terms of PM Kisan measure which was just front loaded now, the allocations for construction workers welfare fund and district mineral foundation fund. Hence many organisations don’t consider the already budgeted portion as part of the fiscal measure.
• Immediate impact: The government has allocated funds to food micro enterprise, fishery and herbal which according to some experts will not have impact in the short to medium term. Hence some of the organisations have not considered this as part of fiscal measure.

What has been the direct cash transfer measures of the fiscal component of the economic package? Let us look into it.

DIRECT CASH TRANSFER MEASURES

Many economists has been prescribing that Covid 19 and the resulting lock down will lead to a huge loss of income and hence there should be direct cash transfers to people as that will generate demand and will kick start the economy while there are others who feel that the resultant increase in fiscal deficit because of direct cash transfers will be huge and will be detrimental for the country . Let us see what are the direct cash transfer measures taken by the government as part of the economic package.

Now it is seen that all the above measures together contribute to 0,54% of GDP. Now this includes the front loading of the PM Kisan funds, which is not a new allocation. So new allocation in terms of cash in hand boils down to be 0.45% of GDP. Now the additional amount allocated for MGNREGA will only be paid once works are done on this and hence the impact of this might not be immediate. So the new allocations in terms of cash in hand component which will have a immediate impact boils down to 0.25% of GDP.

Conclusion

A sizable section of the economic package talks of providing more liquidity in the market. It is to be seen in the next few months that how much is the credit off take witnessed by the financial institutions. In terms of fiscal component of the economic package the experts put this in the range of 0.7% to 1.5%. Now this additional fiscal commitment made as part of the economic package will lead to around 1-2% increase in the fiscal deficit. How effective the fiscal stimulus will be and whether it is sufficient remains to be seen in the months to come. There is a need of constant monitoring of the effectiveness of each of the measures announced and quick action needs to be taken if something appears to be not working.