Stimulus 3.0 package: Nomura raises concerns over funding source, says 'fiscal maths do not add up'

Prime Minister Narendra Modi-led government on Thursday announced its third installment of fiscal stimulus to provide job incentives and credit guarantees for stressed firms disrupted by the COVID-19 pandemic. The measures aim to prevent the scarring effects of the pandemic by creating demands and offering supply-side incentives to attract global value chains to India.

On the government's Rs 2.65 lakh crore package, which amounts to 1.4 per cent of GDP, Japanese research firm Nomura said the headline stimulus is large, but the funding remains a key puzzle. It does not expect a positive growth impulse as there is rising risk that overall expenditure will be contractionary, it said.

"From an economic perspective, therefore, while the headline stimulus announcement in the third package is much larger than the second one, we see growing risks that overall expenditure will still be contractionary, and is unlikely to result in a positive growth impulse," it said.

The agency expects the current year's budgetary impact to total Rs 1.2 lakh crore (around 0.64 per cent of GDP), while the central government's fiscal deficit is seen widening to 8.3 per cent of GDP in FY21 as against the original budgeted target of 3.5 per cent of GDP, with risks skewed towards an even higher deficit.

Nomura said that fiscal maths behind stimulus do not add up as the government's spending is already in contraction mode (contracting 15.2 per cent YoY in August and 26 per cent in September), while other sources of financing such as small savings and T-bills are unlikely to be enough to plug this funding gap.

"The Finance Minister Nirmala Sitharaman maintained that the additional borrowing already announced (worth Rs 4 lakh crore or 2.1 per cent of GDP) will be sufficient to fund all measures. In our view, the maths does not add up. Across the three stimulus measures announced so far, total additional cash outgoings from the budget amount to 1.8 per cent of GDP. Meanwhile, revenue collections on tax, non-tax and disinvestment proceeds are running 5 per cent of GDP below the budgeted target, even after assuming a recovery in tax collection in the remaining months. Hence, the total budgetary shortfall (higher spending + lower revenues) is around 6.8 per cent of GDP, much larger than the additional borrowing (2.1 per cent of GDP) announced so far," Nomura explained.

"The funding of these measures remains a key puzzle, as revenues are already behind target, while the government does not intend any further market borrowing. To address the funding gap, we believe the government is likely to choose between borrowing more later in the year, cutting other expenditures, or a mix of both," said Namura in its latest report.

The research firm said that the government's fiscal interventions are increasingly shifting from income support to a demand boost, with a firm eye on the fiscal bulge. "Close on the heels of a conservative set of demand measures in October, the government announced another set of measures aimed primarily at stressed sectors and employment generation. Four key themes emerge as the focus areas of today's measures," it said.

Nomura said that the latest round of announcements highlight three broad priorities of the government - job creation and credit guarantees for the stressed sectors, to boost housing sector, supply-side reform through production-linked incentive (PLI) scheme.

The agency maintained its growth forecasts, with GDP growth likely to improve to a still-weak -10.4 per cent YoY in Q3 (July-September period), from -23.9 per cent in Q2, before averaging around -4.5-5 per cent in Q4 and Q1 2020, due to contractionary fiscal policy, fading pent-up demand and weaker global growth due to rising infection cases in the US and Europe.

Also Read: Centre approves funds worth Rs 4,381.88 crore to 6 cyclones, flood-affected states

Also Read: Business optimism for Oct-Dec rises 57% over Q3 2020: D&B survey