The Atmanirbhar Bharat package 3.0 has offered a comprehensive set of announcements, although its assessed standalone fiscal cost is modest. Nevertheless, this package is expected to provide a fillip to sentiment, and help solidify the strength of economic recovery that is underway in H2 FY2021.
The package offers a variety of measures to boost capital spending and infrastructure investment, incentivise job creation, and also provide support to the farm and non-farm portion of the rural economy.
These measures, especially the ones focused on the core sectors that have a higher multiplier effect, such as the increase in the outlay of Rs 18,000 crore for the PM Awaas Yojana- Urban will help trigger positivity in the economy. Although the growth pay-off of some of the measures that have been announced on Thursday, such as the equity infusion into the NIIF-debt platform, may only become visible over the medium term, they are nevertheless encouraging.
Overall, we peg the fiscal cost of today’s announcements at a modest Rs. 1.2 trillion, which is dominated by the enhancement in the outlay for fertiliser subsidies, that is alone equivalent to Rs 65,000 crore.
This fresh allocation of Rs 65,000 crore for the fertiliser subsidy, which nearly rivals the size of the budgeted outlay of Rs 70,000 crore for FY2021, is expected to provide a significant boost to the fertiliser industry. This will help resolve the subsidy delays that this industry has faced over the last several years and that have weakened its credit profile and profitability. ICRA estimates that the subsidy backlog would have reached around Rs 60,000 crore by the end of FY2021, given the robust volume expansion in fertiliser sales in the current fiscal. Accordingly, the enhancement in the outlay for fertiliser subsidy appears to be adequately sized in our view.
Notwithstanding the robust reform momentum and stimulus announcements so far, government spending lost steam in Q2FY21. The total expenditure of the government contracted by 13.5% on a YoY basis in Q2FY21, after having expanded by 13.1% in Q1FY21 on a low base. We hope to see the pace of spending record a turnaround in the ongoing quarter, to help solidify the economic revival.
The RBI has now confirmed that India is in a recession, with a contraction in GDP being projected for Q2FY21 as well. The question now is, how soon will the recession end- as early as Q3 or Q4 of FY2021, or only in Q1FY22? We continue to parse the high frequency indicators to get a more definitive answer to this question. Regardless, a revival in the Indian economy is clearly underway.
At present, our forecast for Indian real GDP in FY2021, is of a contraction of 11.0%. We will revisit this projection in early December 2020, after the data for Q2FY21 is released by the NSO. By then, there will be greater clarity on the likelihood of the endurance of the festive season uptick, as well as the pace of new Coronavirus (Covid-19) infections domestically and in major trading partners during the colder months.
Aditi Nayar, Principal Economist, ICRA. Views are her own