Devil of Modi’s mega stimulus package lies in the details

The ₹20 lakh crore stimulus package announced by Prime Minister Narendra Modi on Tuesday (May 12) night seemed like an answer to 1.3 billion prayers.  By offering nearly 10 per cent of India’s GDP to revive a nearly moribund Indian economy post the COVID-19 disruption, Modi seemed to have shut up naysayers, who had begun exhorting the government to loosen purse strings.

There were examples galore, from Japan to the United States, of countries which have already announced a massive priming of the pump for tackling the unprecedented economic slowdown brought on by COVID-19.  But now that India has announced its own mega stimulus, is the economy actually going to get a fillip? More importantly, where is the money for such generous spending going to come from?

How much new money?

Now this is where the devil, as always, will lie in the finer details. Finance Minister Nirmala Sitharaman is expected to provide details of how much is being allocated to which all sectors this week. But suffice it to say that the announcement yesterday hides nearly as much as it reveals. Modi said during his address to the nation that the ₹20 lakh crore figure will include the stimulus already announced by his government and by the Reserve Bank of India (RBI).

The government had, on March 23, announced the first set of stimulus measures totalling to ₹ 1.7 lakh crore or 0.85% of GDP.  Though experts later explained that the actual new money injection was only about ₹1 lakh crore because nearly ₹70,000 crore was repacking of old schemes, the entire ₹1.7 lakh crore should be deducted straight away from the ₹20 lakh crore figure.

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Then, the RBI has already announced two rounds of monetary stimuli. In a statement on April 17, RBI Governor Shaktikanta Das said that together with the measures announced on March 27, the RBI’s liquidity injection stood by then at about 3.2 per cent of GDP. So between the first hesitant fiscal stimulus by the government and the monetary stimulus by the RBI, nearly 4 per cent of GDP is already taken care of. This means any fresh stimulus cannot be more than 60 per cent of the amount the prime minister mentioned, in any case.

There is also the matter of clubbing what is essentially a monetary aspect of policy making – when RBI injects money into the system – with the fiscal aspect, which essentially means government spending.  Usually, the two are not clubbed to arrive at a consolidated figure.

Analysts at a Mumbai based brokerage firm have suggested that direct fiscal support out of this mega ₹20 lakh crore package may only be between a fourth and less than a third of the amount. They said in a note that though details of the stimulus package are yet to be unveiled and forming definitive views about the impact of Stimulus 2.0 would be possible only when details are known, “yet, going by cross-country experience and India’s fiscal situation, we expect only ₹4-6 trillion (₹4-6 lakh crore) direct fiscal support versus ₹18-24 trillion (₹18-24 lakh crore) direct damage from the pandemic. We expect contingent liability measures (like loan guarantees) to form the rest of the package.”

Where will the money come from?

The more troubling question in this entire exercise is the process the government will use to finance such a large monetary and fiscal stimulus. The government has already announced enhanced borrowing of nearly ₹4.2 lakh crore this fiscal, taking the total to ₹12 lakh crore. And there is wide consensus that even this expanded borrowing target may not be sufficient to provide for the large fiscal stimulus Modi has announced to much cheering.

Apex industry chamber, the Confederation of Indian Industries (CII) has suggested that in order to finance the broad elements of the stimulus package it has proposed (this proposal talked of ₹15 lakh crore) ₹4 lakh crore worth of support could come “from the subscription of government paper by the RBI, given the fact that inflationary pressures remain muted in view of depressed demand conditions. A lower amount of ₹2 lakh crore can be borrowed by the government from the secondary market, so that bond yields remain moderate. Further, substantial reduction in expenditure of around ₹4 lakh crores is possible by reducing some of the discretionary expenditure such as centrally sponsored schemes.”

So in effect, a vastly expanded borrowing programme, cutback in public expenditure and roping in the RBI seem to be some of the options before the government. But what will such an expanded fiscal position mean for the country’s fiscal deficit? Another brokerage said that money offered as direct cash transfer to the needy and tax sops – whether GST rate rationalisation or personal income tax measures –will impact the fiscal math but measures such as offering a credit guarantee to micro, small and medium enterprises (MSMEs) will not impact the overall fiscal deficit.

Will the poor, jobless, hungry get anything?

Details of the package are still awaited. Whenever the government provides a sector wise breakup, there will be obvious queries on whether the section most affected by the pandemic – Indians who lost their jobs due to prolonged lockdown, the poor and the hungry, those whose small businesses have little chance of revival now – will get a lion’s share of the package.

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Former Finance Minister P Chidambaram today tweeted, “We will also carefully examine who gets what? And the first thing we will look for is what the poor, hungry and devastated migrant workers can expect after they have walked hundreds of kilometres to their home states.”

The Modi government has faced some flak over its handling of the mushrooming migrant crisis, the rising joblessness and hunger due to COVID-19 lockdown. It remains to be seen whether the bottom half of the population gets its due from the government now.