Aiming for the right corners, but not a consumption trigger

The finance minister has announced measures worth Rs 11 lakh crore in five tranches over the past few days to contain the economic fallout of the Covid-19 pandemic. Add to this the earlier announced measures worth Rs 9.9 lakh crore (RBI liquidity support and others), and the financial support works out to Rs 20.9 lakh crore.

Given the fiscal constraints, the government has undertaken measures that can magnify the impact of every rupee of stimulus. Hence the liberal use of guarantees and tiered funding structures.

This reflected in the actual committed fiscal outgo of Rs 1 lakh crore, translating to a meagre 9% of the Rs 11 lakh crore of measures outlined over the five tranches. The bulk of this direct support would be through the Pradhan Mantri Garib Kisan Yojana.

The government has also ploughed in some earlier discussed structural reforms, especially in tranches 4 and 5, to help drive India’s medium-term growth story. The announcements pertain especially to sectors such as mining, aviation, urban infrastructure, power, and agriculture.

Further, the government has increased the borrowing limit for state governments from 3% of their gross domestic product (GDP) to 5% of GDP. However, of this additional 2 percentage points, 1.5 percentage point is conditional upon states achieving certain targets.

For addressing near-term issues, apart from direct benefit transfers and additional spending through MNREGA, the government has mobilised credit to micro, small and medium enterprises (MSMEs), agriculture, and the affordable housing sector. The 100% guarantee on Rs 3 lakh crore loans to MSMEs with one year moratorium, for instance, will help these units, which are typically strapped for working capital. It will also spur credit growth for both banks and non-banks this fiscal and contain delinquencies in the segment, which would have increased otherwise.

Also, relaxation of insolvency norms should help companies in the near term as they will be protected from liquidation arising out of Covid-19 environment.

The key monitorable now would be how states enable the implementation of various schemes and measures and work in close partnership with the Centre.

To conclude, while most steps from government are steps in the right direction, it is unlikely to stimulate demand/ consumption given that the package is more focussed on supply-side reforms. Also, no clear announcements were made for highly vulnerable sectors such as airlines, tourism and hotels, barring the additional lending for MSMEs in the space, or to improve the sentiment of the workforce, both organised and unorganised. Further, while the government has not added much to its current year fiscal outgo – and thereby deficit –it will weigh on public debt next fiscal unless the economy revives.