The stimulus and beyond: Is a stronger demand support called for?

Magnitude of stimulus: the sum and substance

The final picture of central government’s Covid-related stimulus package at the conclusion of the fifth tranche of finance minister’s announcement sums to Rs 20,97, 053 crore, which amounts to 9.8% of FY21 GDP. Only about 10% of this stimulus can be traced as direct additional budgetary cost to the central exchequer. Nearly 5% of the stimulus relates to already budgeted expenditures. The rest of the stimulus primarily pertains to RBI’s liquidity enhancement measures, government’s credit guarantee programs and insurance schemes. 

Migrant labour and MSME sector

The definition of an MSME entity has been changed to accommodate growth of entities within this sector. A large package amounting to Rs 3,70,000 crore should help them reboot their production activities. In addition, a benefit amounting to nearly Rs 75,000 crore has been provided for NBFCs including HFCs and MFIs which should facilitate activation of their lending program particularly to the MSMEs. 
 

A string of measures was announced focusing on the poorer segments of the society including migrant labour, small and marginal farmers and urban poor. These measures included a mix of short-term relief provisions and a scheme for affordable rental housing for migrant workers and urban poor. 

Structural reforms: features of the new normal 

A number of major structural reforms were also introduced. These include repositioning of the public sector, decriminalization of certain corporate lapses, privatization of coal and other mineral mining, increased FDI limit in defence, ban on imports on specified defence weapons/platforms, and privatization of discoms in union territories. Direct listing of Indian companies abroad will enable them to raise capital overseas. In the case of agriculture, a genuine barrier-free all-India market for agricultural produce is a key feature of India’s new normal. These are far-reaching efficiency augmenting supply side reforms.

Allowing companies to focus on getting their businesses back on track post the Covid-19 crisis, without the fear of insolvency, is a welcome move. However, if companies wanted to opt for an insolvency on their own, it would be desirable to have the ‘Section 10’ option still available. Also, for the recovery of businesses, the recent announcements will have to be accompanied by an effective mechanism from the RBI/government to solve the debt overhang. A one-time debt restructuring mechanism or a pre-pack regulation may be useful. More clarity on aspects defining the scope of ‘Covid related debt’ is also needed. 

Prioritization of health and education

Although the proposal to increase public health expenditure was announced but no magnitude was indicated except for the Covid-19 Emergency Response and Health System Preparedness Package amounting to Rs 15000 crores. The government should uplift health expenditure to at least 2.5% of GDP as envisaged by the National Health Policy 2017 as early as possible.

For education also, the challenge posed by the Covid-19 pandemic has called for IT-enabled innovations that may become a part of India’s new normal. This would include PM e-Vidya programme including ‘one channel for one class’, new DTH channels, extension of Diksha, and special e-content for visually and hearing impaired.

Relief to states through enhanced borrowing limit

State governments would welcome the enhancement of their borrowing limit from 3% to 5% of their respective GSDPs. But not many of them may avail of the entire incremental amount due to the likelihood of a tangible increase in the borrowing cost because of the large gap that appears to be emerging between the total public sector borrowing requirement (PSBR) and the available resources. With the enhanced borrowing program of the centre and states and the borrowing requirement of the public sector enterprises, we consider the total PSBR to be about 14% of GDP in FY21 as against available resources of about 9.5% of GDP. States have already experienced a sharp increase in their cost of borrowing as the yield of 10-year state government bonds auctioned on 7 April 2020 rose by nearly 100 basis points as compared to that which prevailed a month before. Given the dismal tax revenue performance in April and May 2020, state governments may do well to frontload most of their permitted borrowing in the early part of the year so that they can start spending including on their infrastructure investment, thereby supporting demand.

Need for additional demand support

The overall package focussed on supply side measures. However, one important demand component was brought in by the enhancement of the budgeted MGNREGA allocation of Rs 61,500 crores in FY21 by Rs 40,000 crore. Together, these add to about 0.5% of GDP which is a substantive amount to support rural demand and agricultural prices. More demand-oriented measures may yet be introduced as we are still in the early stages of coping with the economic impact of Covid-19. 

(D K Srivastava is the Chief Policy Advisor, EY India and former Director, Madras School of Economics)