Making sense of Rs 20 lakh crore stimulus package

If you are wondering where the money for Rs 20 lakh crore stimulus package is going to come, the answer lies in the government's Chief Economic Advisor (CEA) Krishnamurthy Subramanian's assessment of similar packages announced by other countries.

He says those stimulus package numbers - 10-15 per cent of GDP - if seen carefully, turn out inflated and exaggerated. He takes the example of United Kingdom, where the stimulus package is said to be 15 per cent of the GDP. But he says if seen carefully, the (15 per cent) number is not correct. The actual number is just 3.7 per cent of the GDP.

"The package includes 350 billion pounds of loans, which are being guaranteed by the government. If you look at the actual fiscal impact of the package, it will be a fraction of 350 billion pounds. So the actual number is 3.7 per cent of the GDP," he explains.

Similarly, he says that the US fiscal package, if seen carefully, is not 10 per cent but just 6 per cent of the GDP.

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Taking cue from CEA's assessment of other countries' stimulus packages, it seems the Rs 20 lakh crore package would be an assortment of government's own fiscal package and several others steps (some of which have already been announced), mostly providing liquidity and making credit available for industry. Some of the steps could take effect over a long-term and may not directly impact government finances in the current financial year.

According to Goldman Sachs India, although it was not clear from the speech and details are not available yet, it seems that the package announced today could include some previous economic measures taken by the government and the central bank to deal with the crisis - RBI had lowered policy rate by 75 bps to 4.4 per cent in March and had infused liquidity to the tune of 3.1 per cent of GDP between February and April, and a fiscal package amounting to 0.8 per cent of GDP was announced by the Finance Minister in March.

The government has in March announced a fiscal package amounting to Rs 1.7 lakh crore, or 0.8 per cent of the GDP.

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In a statement, JP Morgan said that one needs to be careful about extrapolating whether the 10 per cent of GDP will be fresh stimulus for the economy, because no details are available yet.

It says: "The 10 per cent of GDP package is likely to subsume the first announcement of about 0.8 per cent of GDP but it's not clear whether it includes liquidity measures already announced by the RBI that amount to about 2.5 per cent of GDP - which is likely given the reference to liquidity in the PM's statement, how much of this is a credit guarantee scheme versus fresh spending; and whether existing spending will be re-purposed for this package."

The package will be 'packaged' in such a way that the government does not have to take the burden on its finances. To put things in perspective, the government for the current year had budgeted for only Rs 20 lakh crore revenue after deducting the states' share in the tax pool, and therefore it can do only as much.

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The government has recently revised upwards its gross public borrowing for 2020-21 by Rs 4.2 lakh crore, but this, according to experts, will cover only the shortfall in revenue collection given an extended lockdown period and shutting down of economic activities. With higher borrowings in the current financial year, the fiscal deficit is already likely to breach 5.5 per cent, may even touch 6 per cent if the nominal GDP growth rate is below 2 per cent.

Therefore, given the central government's fiscal constraints, it is unlikely that a large part of this stimulus package will be borne by the government.

The RBI, which has already infused liquidity Rs 3.75 lakh crore by reducing repo rate and reverse repo rate sharply - a 100 bps cut in CRR, etc on 27 March 2020 - may further announce liquidity infusion measures. Then there could be other measures like banks offering additional working capital and term loans, a part of which will be guaranteed by the government.

The package could also include front-loading some of the measures like making advance payment of their share of taxes to states, etc.

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