Govt’s stimulus package on anvil
A comprehensive package of policy reforms, financial incentives and monetary measures is in the works to re-energise the economy by giving more fiscal space to the states, accelerating public works, easing the availability of credit and putting more cash in the hands of the people to generate demand, three people aware of the plan said.
The package is likely as soon as this week, they said, requesting anonymity and added restarting the economy, buffeted by the coronavirus crisis and the consequent lockdown, will require special efforts by all stakeholders, including the government and industry. “The PM will take a final call based on feedbacks from states and key ministers and top bureaucrats,” said one with direct knowledge of the matter.
An economic package has been in the works since late March. The expectation was that the government would announce it in early April. The third phase of the lockdown expires on May 17 and is expected to give greater freedom to economic and business activity, with some restrictions remaining in place.
The pandemic spread to the Indian economy at a time when it was vulnerable, having been hit by the downturn in household spending and private investment plus a credit crunch. The International Monetary Fund (IMF) has predicted that growth in Asia’s third largest economy would slow to 1.9% in fiscal 2020-21, the slowest in three decades. This month, credit assessor Moody’s Investors Service forecast zero growth for India in the year.
The people cited above outlined the broad contours of the draft stimulus package. The Centre is in talks with states to relax provisions of the Fiscal Responsibility and Budget Management (FRBM) Act so that the latter can borrow money to finance the fight against Covid-19. But, the exemption from the FRBM Act may not be unconditional. States will also have to commit to wide-ranging reforms in areas like labour regulations, agricultural marketing, urban development and power distribution, the second person said.
The Centre on Friday raised its own market borrowing estimate for 2020-21 to ₹12 lakh crore from ₹7.80 lakh crore estimated earlier to make up for an expected shortfall in revenues. According to an economic analysis by securities firm Nomura, this suggests a FY21 fiscal deficit of over 5.5-6.0% of GDP. Nomura expects the central government’s fiscal deficit to expand to 7% of GDP in FY21.
The proposed stimulus package will also have a component to boost demand that would include direct cash transfers to the underprivileged sections. The Centre will also prod public sector banks to transmit the benefits of policy rate cuts announced by the Reserve Bank of India, they added. “If required, the RBI could consider the option of quantitative easing as a mechanism to reduce cost of borrowing,” the first person said.
The package will have specific schemes to support micro, small and medium enterprises, but many policymakers believe the incentives should be routed through agencies such as banks, non-banking finance companies (NBFCS) and the Small industries Development Bank of India (Sidbi), the people said. The government is also considering giving sector-specific fiscal and policy support to large industries.
Sangita Reddy, president of the Federation of Indian Chambers of Commerce and Industry, in a letter to finance minister Nirmala Sitharaman on Sunday and proposed a comprehensive stimulus package worth ₹10 lakh crore.
“By the time the third phase of the lockdown ends, the economy would have lost almost two months of output,” Vikram Kirloskar, president of the Confederation of Indian Industry, said.