The Prime Minister’s speech on Tuesday has been quite inspiring, as there is a clear number provided for an economic relief package of 10 per cent of gross domestic product (GDP), which is around Rs 20 trillion. It has also been stated that this will cover all people including migrants, farmers, small and medium enterprises (SMEs), middle class, and one assumes some industrial sectors also. The details will be keenly awaited.
There are two points of interest in this package. The first is the form which it will take, and hence, how it will be distributed over different constituents that are targeted. The second is the implementation. That’s because the first package announced in March for the poor has had a serious limitation of unsatisfactory delivery and the plight of the migrant population stands as testimony to the Centre-States communication and coordination.
The PM has mentioned that the package will have contribution of all arms, which includes also the Reserve Bank of India (RBI). The central bank has already highlighted that the monetary stimulus has been significant, which takes into account the long term refinance options (LTROs) and a cut in cash reserve ratio (CRR) to 3.2 per cent.
The first question is whether the package amount announced on Tuesday will start from Wednesday also includes what has been done in April, which also had the Finance Minister’s (FM’s) package of Rs 1.7 trillion for the needy.
Second is the sharing of this with the RBI. Any measure from the RBI will technically not be money being spent, but high powered money created which can be used for lending. Here, it is expected that the RBI will have an aggressive lending programme through the LTRO route that can be sector-specific so that there is a flow of funds to companies. This monetary impetus can also be defined as lending targets for agriculture and SMEs with scope for further restructuring of loans to them. Even the Union Budget does normally talk of targets for farm loans, which can be a part of this programme.
Third is the role to be played by the government in terms of taxation and spending. On taxation front, lowering of tax rates for individuals is something which will be expected, given that people have lost jobs or salaries for an undefined period of time. That apart, corporates would expect some more rebates to alleviate their tax payments this year.
On the expenditure side, the government would be expected to do several things. The first is to rollover the Rs 1.7 trillion package, as those who are distressed would require continued support. This assumes significance as these people are unlikely to return to their place of work this year. The government could also opt for some farm loan waivers to be shared with states. The PM did mention the farming community in some detail, and such a move would be beneficial. It is expected quite widely that there would be loan guarantee coming from the government, which can be for a high amount of around Rs 5 trillion.
In this set-up, the pertinent question is what could be the quantum of additional fiscal deficit that can be taken on by the government. The large revenue slippages this year have already translated into additional government borrowing of Rs 4.2 lakh crore and the fiscal deficit ratio can reach around 5.50-6 per cent in the normal course. Assuming there is a 10 per cent fiscal deficit number which is being targeted, it would tantamount to around Rs 10 lakh crore of fresh spending and also borrowing. Can the market take in this amount?
Presently with surplus liquidity of Rs 5-7 trillion, the additional Rs 4.2 trillion of borrowing could be met even in case there is a pick-up in commercial credit in second half. Now if even Rs 5 trillion of extra borrowing has to come into the market, it will be hard to match and there would be need for more RBI intervention with LTROs and OMOs to provide liquidity to banks to subscribe to government paper. The option of direct financing by RBI, though not permitted, can be enabled and used as the last option.
Hence, we can expect RBI to play in tandem with the government in implementing this package. But hopefully, the government is determined to deliver relief to the needy. The state of migrants even today is a sad reflection of our limited ability to handle such a crisis.
(Madan Sabnavis is chief economist at CARE ratings. Views are personal.)