Quick Take | The economic package is finally here, how much will be an actual fiscal stimulus?

The central government has finally responded to the calls for fiscal stimulus to lift the economy from the COVID-19 slump. The Prime Minister has announced a broad sweeping economic package of Rs 20 lakh crore. This amount is two-thirds the size of the government budget announced this February. With this India catapults other emerging markets in terms of the size of an economic package relative to its GDP, which stands at 10 percent.

Naturally, the markets will be exultant with this announcement. The SGX Nifty index is up some 4 percent up at the time of writing. After the markets started rebounding last month, an increasing disconnect with the ground economic reality was evident. Company earnings were disappointing and GDP growth forecasts for FY21 had gone into negative territory. The economic package will now potentially change all that. It promised to address the need of every constituency from farmers, migrants, and industrial workers to the “honest tax payer.”

The fact that the finance minister will stagger announcing the details is also perhaps a good thing. It could prevent volatility in equity market, especially on the downside, particularly if expectations aren’t met.

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Why wouldn’t expectations be met? Well, although the package is a purported 10 percent of GDP the devil will lie in the details. It appears that the package will also include the fiscal stimulus package of 0.8 percent of GDP announced by the finance minister on March 26 and the Reserve Bank of India providing liquidity of about Rs 5.2 lakh crore.

Also Read | PM Narendra Modi speech: Rs 20 lakh crore package is eye-popping but devil is in the detail

Debt markets will also be keenly watching these developments especially after the government had increased its borrowings by 54 percent from the budget number for FY21. Yields on the benchmark government bond had run up by 20 basis points after the announcement. Bond investors will keenly watch how much the fiscal deficit will increase, whether the RBI will monetise part of the deficit (it appears inevitable) and whether the monetary policy committee will cut rates further.

Thus, a lot depends on how much of the package is an actual fiscal stimulus – in other words, increase the fiscal deficit. For instance, providing a 10 percent credit guarantee while expecting banks to pick up 90 percent credit risk and boost lending might not work.

Be that as it may, the economic package is the right thing to do especially since the PM hinted at the continuation of the lockdown. He said details of lockdown 4.0 will be released before 18 May. They will possibly contain more relaxations.

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