Rs 20 Lakh Crore Hope

Rs 20 Lakh Crore Hope

PM Narendra Modi announced a Rs 20-lakh-crore stimulus package, equivalent to about 10% of India’s GDP, aimed at making the country self-reliant and reviving the stalled economy. Details of the plan, dubbed the Atmanirbhar Bharat Abhiyaan, will be unveiled by finance minister Mrs. Nirmala Sitharaman today evening at 4pm.

The package is seen as a government attempt to check the world's fifth-largest economy hurtling towards its first full-year contraction in four decades. According to estimates, lockdown may have led to 12.2 Crore people losing jobs and consumer demand evaporating.

The package will focus on land, labor, liquidity and laws, and will cater to various sectors including the cottage industries, micro, small & medium enterprises (MSMEs), the working class, middle class and industry, among others. He said the package will also focus on empowering the poor, laborers and migrant workers, both in the organized and unorganized sectors. It will seek to increase efficiency and ensure quality.

As part of the package, Mr. Modi hinted at sops for the middle class and Indian corporate as well as changes in customs duties on imports to make Indian products competitive. This could mean lowering of import duties on raw materials needed for products manufactured in India, as well as higher import duties on finished products to ensure Make in India becomes successful.

The Rs 20 lakh Crore package includes Rs 1.7 lakh crore package of free food grains to poor and cash to poor women and elderly, which was already announced by Finance Minister Mrs. Nirmala Sitharaman, along with the Reserve Bank's liquidity measures and interest rate cuts. While the March stimulus was 0.8 per cent of GDP, RBI's cut in interest rates and liquidity boosting measures totaled to 3.2 per cent of the GDP (about Rs 6.5 lakh crore).

The exact details of the Rs 20 lakh Crore economic package hinted at by Prime Minister Narendra Modi are not known yet, but a plain reading of the number hints at more government borrowings and possible debt monetization (printing of currency notes) in the near future.

The Modi government had also announced Rs 40,000-crore production-linked incentive scheme to encourage large-scale electronics manufacturing in India in March2020. It remains to be seen if this will be included into the calculations of the economic package.

Last week, the government raised the borrowing target by over 50 per cent from Rs 7.8 lakh Crore to Rs 12 lakh Crore. This borrowing won't be sufficient to accommodate a large size fiscal stimulus.

But it is not right to say India's fiscal stimulus is 10 per cent of its GDP. That's because the RBI's infusion of liquidity into the system is not an economic stimulus. Also, the liquidity hasn't translated into credit or gone to sectors that needed the most.

The Rs 20 lakh Crore package amounts over 65 per cent of the government's 2020/21 budget of Rs 30.42 lakh Core. The numbers do not really add up. The PM has included the earlier two packages in the Rs 20 lakh Core. Finance Minister Nirmala Sitharaman's relief package of Rs 1.74 lakh Core had items that had already budgeted in the Union Budget 2020/21. This includes the money for MGNREGA and PM Kisan. The actual amount over and above the budget was estimated to be Rs 1 lakh Core out of the Rs 1.74 lakh announced by the FM. Essentially, the actual stimulus was Rs 1 lakh Core only.

Similarly, RBI's Rs 4.74 lakh Core package was more of liquidity infusion and didn't actually translate into helping sectors which needed the money most. Banks didn't disburse money based on liquidity. Much of the RBI liquidity measures saw money flowing back to the RBI. The money remained with banks and the RBI.

If you remove Rs 6.54 lakh Core -the total of two packages -the economic package comes out to around Rs 14 lakh Core. The PM hinted that the package includes liquidity measures. Clearly, he is hinting at more measures from the RBI side which is not stimulus. Assuming Rs. 2 lakh Core liquidity infusion by RBI is added to the package, the remaining economic package amount comes out to be Rs 12 lakh Core.

Similarly, the remaining amount of the package could include some guarantee, which again is contingent. They could incentivize banks to lend few lakh Core, which will not be a hit on budget numbers.

Even if we assume additional money of Rs 10 lakh Core, the current borrowings won't be enough to accommodate it. The government will need additional money from the market – which may not have the appetite to buy such large quantities of government paper. Government may therefore, would go in for debt Monetization and or Quantitative Easing soon or may derive from PF Funds.

Wise men think that most of the money would be used for buying land by the state or from state of approx. 7Lac Core. For Infra projects money would be spend to the tune of Rs.5 Lac Core by Gov and Rs.5 Lac Core would be pitched-in by PPP Model , of which bank would finance by keeping PPP company as guarantor.  Portion would be used for Labor law reforms for VRS purpose, and balance would be the amount spend on Defense purchases.

Best Luck PM Sir; nation is looking at you with expectation and due reservations.