Fresh support of only Rs 12-13 trn in economic stimulus: DBS Bank economist

PM Modi outlined a Rs 20-trillion which is 9.7 per cent of GDP support package, of which new allocations could only be 50-60 per cent of the offer

Of the Rs 20-trillion package that Prime Minister Narendra Modi announced to defend the economy against coronavirus disruptions, fresh support may be only around 60 per cent of the offer as it counts the first financial stimulus and liquidity support that Reserve Bank has given already, and will overburden bond market, says a report.

In a big push to revive the COVID-hit economy, PM Modi on Tuesday announced massive new financial incentives on top of the previously announced packages for a combined stimulus of Rs 20 trillion.

Modi outlined a Rs 20-trillion which is 9.7 per cent of GDP support package, of which new allocations could only be 50-60 per cent of the offer. But until more details are known, financing burden will fall on the bond markets, Radhika Rao, the economist at Singaporean lender DBS Bank said in a note on Wednesday.

She further noted that "the new fiscal package is upsized and its scale lends a positive surprise, at a bigger-than-anticipated size with emphasis on making the economy more self-reliant via local manufacturing and improved supply chains.

It can be noted that the government had in late March announced fiscal measures worth Rs 1.7 trillion while the RBI offered liquidity support of Rs 3.7 trillion in March and Rs 2 trillion in April.

"The new fiscal measures might account to around 60 per cent or Rs 12-13 trillion. If this includes a wider net of RBI measures, then the new package might amount to Rs 10 trillion," Rao said.

She further said coordinated approach is needed to cushion a part of the after effects of the growth slowdown, which will impact incomes, jobs and business viability.

The nuances of the measures are key, particularly details on how much is about short-term relief for Micro, Small & Medium Enterprises (MSMEs), sector-specific payouts, cash handouts to the poor, loan guarantees, capital infusion into banks, Mahatma Gandhi National Rural Employment Guarantee Act (MNEGRA) etc, and on medium-term priorities like infrastructure, labour/land reforms etc.

"This will dictate the extent of economic cushion to growth, incomes and employment outlook this year," she said.

On the fiscal side, the report said revenue shortfall is already translating into an increase in deficit from budgeted 3.5 per cent to at least 5.5 per cent now. Assuming only part of the spending is reflected in the FY20 fiscal math and capital spending is scaled back, the deficit might rise by another 2.5-3 per cent of GDP.

On the financing side of the package, the report said it will have to be seen whether bulk of it will be raised through borrowings especially whether the states will participate, or alternate sources like COVID-19 bonds, multilateral loans, tapping offshore investors/ markets, fresh revenue streams (indirect or income taxes on HNIs) etc.

"Until clarity is available, funding burden will fall on bond markets in the near-term and to stabilise markets, focus will return to RBI's participation," she said adding market borrowing is likely to rise further, by at least Rs 7-10 trillion assuming all is raised domestically and through bond issuances.

But the report warns that the pressure will be on RBI to step up bond purchases given the limited absorptive capacity of domestic investors and risk-averse foreign portfolio investors.