The government's latest fiscal stimulus measures might not have the desired effect and more announcements are likely in the coming weeks to help revive the battered economy, according to analysts.
Economists at SBI Research and Wall Street brokerage BofA Securities on Tuesday pegged fiscal deficit at elevated 9.5 per cent and 12.7 per cent of the GDP, respectively, saying the new measures to boost consumer demand will increase deficit by 40 basis points.
SBI Research pegged the new fiscal impact at 17.8 per cent of GDP, given that most of it is done through the RBI open market operations, and the fiscal deficit of the Centre at 9.5 per cent.
The fiscal impact has been estimated after taking into account the nearly Rs 21 trillion fiscal stimulus package announced by the government in May.
However, BofA Securities estimated it at 12.7 per cent of the GDP as it expects GDP contraction to be only 7.5 per cent for FY21.
On Monday, the government announced Rs 73,000 crore direct fiscal support to generate demand.
The measures include advance payment of a part of wages to central employees and cash in lieu of LTC, and the Centre will offer Rs 12,000 crore special interest free 50-year loans to the states for capital expenditure.
The latest announcements come with a "conditions apply tag" and look like "too little and too late," SBI Research said in a note, adding that only 10-15 per cent of the central employees may avail the cash-scheme because of the mandatory GST component in the offer.
"The LTC scheme is unlikely to work unless the government decides to pay GST component also over and above the fare entitlement amount as is done by many state-run banks," SBI Research said.
And that only the festival advance proposal offers some additional income over and above the current income and therefore is likely help boost demand by way of discretionary consumption, as per the note.
On the other hand, BofA Securities sees further demand-side measures via subsidies to SMEs/ real estate, oil tax cuts, bank interest waiver to arrest the contraction in the economy.
With Monday's measures, it sees "1-2 per cent of GDP upside risk to our 12.7 per cent of fiscal deficit forecast for FY21, which will be funded by OMOs/ bank HTM limit hikes".
More booster doses are needed as "the pandemic is fast progressing from a supply shock to contain spread to a demand shock with incomes/jobs shrinking".
"In response, the potential demand-side steps could include lending rate/ tax subsidies for SMEs/ real estate; oil tax cuts; waiver of interest on interest during the moratorium; and lower income tax cuts with a pandemic cess on the rich," BofA Securities said in a note.
On the Rs 12,000-crore special interest free 50-year loans to the states to be spend till Mar 2021, SBI Research note said that of the total amount, Rs 10,000 crore will be provided to all states in proportion to their share in the Finance Commission devolution. The remaining amount of Rs 2,000 crore will be given to the states which meet at least three of the four reforms conditions given in the May package.
"We believe Rs 12,000 crore is minimal given the fact that this amount is only 1.6 per cent of the states FY21 budget estimates of capex of 18 states. This number will come down further if we add the capex projections of all the states. The extra Rs 2,000 crore will benefit only eight states," the note said.
According to the note, the loan will save the interest expenditure for the states and lower the interest income of the Centre.
"With higher maturity Gsecs trading at around 7 per cent, it leads to a notional interest loss of Rs 40,000 crore for the Centre and a similar gain for the states," it added.