Second stimulus bigger than expected but where is the money?

The Prime Minister on Tuesday announced the much awaited second economic relief package worth Rs 20 lakh crore to bring the economy back on track and make India 'self reliant' at a time when world is facing its biggest crisis in terms of the coronavirus pandemic. This package is likely to include the earlier economic announcements by the government and the RBI to deal with this emergency. "The announcements made by the Centre over COVID, decisions of RBI and today's package totals to Rs 20 lakh crore. This is 10 per cent of India's GDP," said PM Modi.

The demand for a large fiscal stimulus had been emerging from various quarters and the size of the second fiscal measure is much larger than anticipated. Several industry bodies such as The Confederation of Indian Industry (CII), Federation of Indian Chambers of Commerce and Industry (FICCI), the PHD Chambers of Commerce and Industry, and the Associated Chambers of Commerce and Industry of India (ASSOCHAM) have demanded a stimulus package ranging between Rs 10 lakh crore to 16 lakh crore in order to offset the negative impact of a prolonged lockdown on the economy.

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Anticipating a sharp fall in tax and non-tax revenues, the government has substantially increased its gross market borrowing estimates for 2020-21 to Rs 12 lakh crore from the budget estimate of Rs 7.8 lakh crore, taking a big hit on its fiscal deficit. This is an increase of more than 50 per cent from its budget estimates. However, covering both the revenue slip and financing country's budgeted expenditure of 30.4 lakh crore will be a challenge ahead. "The extra borrowing is unlikely to be enough to cover both the revenue slip and higher spending, and we believe the government will have to resort to more borrowing later in the year," said a Nomura report dated May 10.

According to Nirmal Bang Institutional Equities Research estimates, the government will fall short on revenue (both tax and divestment) by around Rs 4.55 lakh crore after accounting for about Rs 1.86 lakh crore in additional excise duties (including the hike in March 2020). The economy is in dire straits and a bigger question is, where will this money come from? More clarity will come once the Finance Minister will provide the details the on the fiscal package.

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