Next round of Covid stimulus: Where can the Centre intervene fiscally?

In meetings over the past two weeks in the PMO, advisors and bureaucrats are learnt to have given their views on what shape and form the next set of stimulus announcements should take

It is now increasingly becoming clear that sometime in the second half of the year, the Narendra Modi government may come up with a second set of stimulus announcements to help the economy recover from the debilitating impact of the Covid-19 pandemic.

The Aatmanirbhar Bharat package, announced over five days in mid-May, mostly addressed supply side constraints and focused on liquidity and credit measures, with the onus on the already stretched banking system.

Officials have hinted, in public and informally, that the next step of announcements will be more focused on the demand side, and will be in the nature of fiscal measures in various sectors. This means that the cost of these measures will be borne by the exchequer.

Last month, Chief Economic Advisor Krishnamurthy Subramanian had hinted that the next set of fiscal measures could be announced after a vaccine was developed against Covid-19. The vaccine, he said, would end uncertainty, prompting people to spend money on discretionary consumption. “It (fiscal support) is not a matter of 'if' but 'when,” he had said.

Business Standard has learnt from senior government officials that a plan is indeed taking shape. In meetings over the past two weeks in the Prime Minister’s Office, advisors and bureaucrats are learnt to have given their views on what shape and form the next set of announcements should take.

Here are areas where direct fiscal support is possible: 

Urban Jobs: In an interview last month, Economic Affairs Secretary Tarun Bajaj confirmed to Business Standard that the is an urban job programme being deliberated upon. “There is something under discussion, an urban-NREGA type of a plan. But it is too premature for me to say something like. Something is in the works, and it is being done by the relevant ministries at the moment. What this crisis has taught us is the issue of the migrant workers in the urban areas. So there will be certain policies in the future to address that issue,” he had said.

While internal discussion is going on, the plan could mature into either an umbrella programme for urban youths similar to the Garib Kalyan Rozgaar Abhiyaan, launched by Prime Minister Narendra Modi in June, or a modified urban-focused version of the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS).

The debate around a job scheme for urban poor has been going on for a while now. The latest to speak in its favour was Ashima Goyal, member of the Economic Advisory Council to the Prime Minister (EAC-PM). “As lockdown eases, people go out and you may see more direct demand stimulus which may take the form of DBT (direct benefit transfer) or infrastructure spending. My personal view is that there is scope for an urban MNREGA where you provide employment to the poor,” Goyal had said in personal capacity earlier this year.

Rural Economy: The government admits that had it not been for the resilience of the rural and economic sector, the GDP contraction expected for this year would have been far worse. The Finance Ministry said on Monday that the push for growth in coming months appears to be pitched in rural India, and will be helped by the recent reforms announced in agricultural sector, including the two Ordinances which will help farmers trade across state lines. India has witnessed record procurement and production of food grains as the rabi crop harvesting gets over and kharif sowing begins.

“Further fiscal intervention could also lead to an expansion of exisiting rural schemes. We have to strike a balance here. Rural economy is doing well and has to be supported, while the urban economy has to be revived,” said an official.

However, a number of economists are now warning that the revival in rural demand seems to be overstated, and after the bounce back in June post the lifting of the nationwide lockdown, demand could now taper down a bit even as Covid-19 spreads to smaller towns.

The centre has pumped in more money into its rural schemes, including the flagship NREGA and PM Kisan. As migrants returned to their villages, the total number of households demanding work under NREGA was almost 71 per cent more in July 2020 compared to July 2019. Data also shows that till July end over 50 per cent of the increased budget of Rs 1.02 trillion for 2020-21 has already been used. It is likely that more money will be allocated to the rural schemes in the coming months.

Infrastructure: The final report of the ambitious National Infrastructure Pipeline was submitted in April. However, it had no mention of the Covid-19 pandemic and the impact that would have on infrastructure financing.

It is now learnt that the centre is going ahead with the plans laid out under the pipeline, which envisages projects worth Rs 103 trillion over the next five years. A top government official told Business Standard that in spite of much lower revenues than anticipated, the centre will not compromise on its budgeted capital expenditure target of Rs 4.12 trillion. Sitharaman has met various infrastructure ministries and state owned companies and they have been instructed to frontload their capital spending.

Officials say that mega infrastructure projects will provide employment and spur demand further, hence is expected that the centre may allocate more money to support infrastructure projects.