The article has been co-authored by Chakshu Aggarwal & Prashant Jain
On 12th May, Prime Minister Modi announced that India will unveil an economic package of INR 20 Trillion, totalling to nearly 10% of GDP. Perhaps PM was trying to compare, India’s effort with developed nations like JAPAN (21.1% of GDP), US (13.3% of GDP), Australia (10.8% of GDP) and Germany (10.7% of GDP). Unlike developed nations, India can’t afford high additional borrowing given already squeezed fiscal space. Recently, finance ministry revised borrowing plan for current fiscal by announcing additional borrowing of INR 4.8 Trillion with total borrowing plan of INR 12 Trillion. It is noteworthy that lockdown has also significantly hampered government revenue, hence this additional borrowing may be necessary to fund shortage in budget revenues from disinvestment and tax collections.
First thing first, Government can/has not funded INR 20 Trillion package, on a contrary package is sum total of RBI measures, Government backed lending and liquidity measure and actual government spending. The pie-chart below depicts that 47% of package (INR 9.9 Trillion) is Government backed lending and liquidity measure and 38% of package (INR 8.0 Trillion) is RBI measures like CRR cut, LTRO…. and just 15% of package (INR 3.0 Trillion) is actual government spending in current fiscal.
Total government package of INR 12.95 trillion has been classified under actual spending (MNERGA, Direct Benefit Transfer, Food Distribution) and government enabled funding and liquidity measures like liquidity to Discom, additional Kisan credit card funding here government just providing guarantee and there is no immediate spending by the government in current fiscal.
Before going into further details, lets understands how fiscal packages work. In an economy, GDP growth is driven by Consumption, Investments, Net Exports (exports – imports) and Government spending.
Consumption, investment and net exports all are pro-cyclical factors, i.e. when economy is doing well, people tends to consume more, companies tends to investment more to cater future demands and net exports are also increases. On the other hand, in situations like pandemic, consumption, investment and net exports has entered into slump simultaneously, thus government spending become key driver for GDP growth. Thus, fiscal package aims at huge government spending, which intends to boost the economic activity.
A closer look at the package suggests that government has focused more on supply side measures than demand side measures. Government’s actual spending is concentrated partially on giving direct benefit transfer to poor for survival and majorly on building infrastructure for various sectors of economy. The liquidity measures by RBI although aimed at providing liquidity to struggling corporate sector but it did not have much impact as it is on discretion of banks to offer loans to corporates and banks are hesitating in offering credit due to risk averse economic environment.
In next two posts, RBI measures & Government measures, We will try to decode the package and weigh in the debate whether government has under spent with just INR 3 trillion as actual spending or government has shown prudence by leveraging funding route to businesses by giving sovereign guarantee to build economic infrastructure in medium term.
Prashant Jain, FRM, is a banking professional with 6+ years of experience in currency markets. He writes about monetary and fiscal developments. He has been associated with teaching for the last 5 years. He has a keen interest in politics and cricket.