Indian Economy - Fiscal Policy

Indian stock markets tumbles on false hopes and hypes of a big fiscal bazooka created by the Finance Minister. Sensex tumbled more than 1000 points whereas Nifty declined by more than 2% on Monday, as D-Street was not fooled by the bluffing calculations. The government’s Rs 20 lakh crore economic support package was intended to help the economy tide over the Covid-19 crisis but in reality a very small amount of direct government spending is involved. As such, it may not be adequate to help push up demand in the economy. Finance Minister Nirmala Sitharaman detailed the package in five tranches, the last of which was announced on Sunday. 

Sensex also slipped as a report suggested that Central government might announce a 30% salary cut of all central government employees and pension holders

The package included liquidity measures already announced by the Reserve Bank of India, loan guarantees and increased spending on some areas such as the rural jobs guarantee programme. The largest part of the package is over Rs 8 lakh crore in liquidity measures announced by the RBI. The government has also decided to provide 100 percent guarantee to Rs 3 lakh crore in small business loans but there will be very much limited response if we go by her policies. In addition, it has raised the allocation to the Mahatma Gandhi National Rural Employment Guarantee Scheme to over Rs 1 lakh crore. Besides that, little direct support has been provided to businesses facing a sudden stop in activity.

Prime Minister Narendra Modi had announced a relief package of Rs 20 lakh crore or about 10 percent of GDP last week. However, many of the measures unveiled have been in the form of moves like loan guarantee schemes which do not entail an immediate fiscal cost.

Earlier on Sunday, Sitharaman announced the fifth and final tranche of the government's stimulus package to revive the coronavirus-hit economy. She said the stimulus package includes the Rs 8.01 lakh crore of liquidity being made available by the RBI.

D-Street estimates that the actual fiscal impact on the budget will be only Rs 1.5 lakh crore (0.75 percent of GDP)

The only measure with a fiscal impact among those announced on Sunday was a Rs 40,000 crore hit due to the moves on upping the works to be carried out under the employee guarantee scheme.

Dil Mannge More - Public Sector Banks o ki Waat Lagne Wala Hai

“The entire package has been quite disappointing. They are trying to avoid a rating downgrade. It is not a time to do the balancing act,” said Abhimanyu Sofat, Vice president, Research, IIFL Securities

The government should have reduced income taxes and GST rates for a couple of months in order to increase the disposable income of the consumers. Unless there is more money in the hands of the consumers they won't spend and likewise if the capitalists doesn't have enough money they can't afford to undertake any form of capital expenditure.

The measures announced will have a cascading impact on various parameters such as cost of borrowing, currency woes, the FII (foreign institutional investment) flows, in particular the debt flows .

The market was expecting a targeted sectoral relief package that hasn't come through. To that extent, the market would have liked more of those. The privatization of coal mining atomic energy and opening up of facilities of ISRO for private sector is just an extension not an addition. 

To further enhance ease of doing business (increase NPA's), minimum threshold to initiate insolvency proceedings was raised to Rs 1 crore from Rs 1 lakh earlier. This will largely insulate medium, small and micro enterprises (MSMEs). The FM said that a special insolvency resolution framework for MSMEs under Section 240A of the Code will be notified soon.

Sitharaman also announced suspension of fresh initiation of insolvency proceedings of up to one year, depending upon the pandemic situation. However, delaying fresh IBC proceedings by one year will hurt the lender and many banks can go out of cash. Will the government compensate the lenders??

FM also raised the state's borrowing limit to 5 percent from 3 percent of GDSP, though with conditionalities and a major privatisation push. With already baffling debt levels the state governments are less likely to increase their borrowing capabilities from the Centre. 

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Souvik Dey

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