Will The Future Relief Packages For India Be Stimulating Enough?

By: Tavaga Research

Ahead of the festive season in India, the markets turn their eye toward another stimulus package by the Government of India. The Government is expected to introduce measures that will revive the demand to pre-COVID levels. To understand what may be expected from the upcoming stimulus packages, let us first take our attention to the measures already announced this fiscal year amid the pandemic.

The Reserve Bank of India (RBI) introduced various liquidity measures over the three months from February to March. The liquidity measures were in the light of the pandemic making itself known to the general public. The measures announced by RBI amounted to Rs 8.02 lakh crore. The measures were focused on boosting liquidity and facilitating credit in the economy; cuts in the interest rate and a special liquidity facility were set up for the mutual funds.

The first relief package was announced on March 26 by the Union Finance Minister, Nirmala Sitharaman. The measures in the relief package amounted to INR 1.7 lakh crore. Details of the package are as follows:

Component	Amount (Rs Crore)
Distribution of free food grains, Direct cash transfer via Jan Dhan accounts to farmers (Rs 500 to Rs 2,000), Distribution of free gas cylinders, the train fare for migrant workers returning home	1,70,000
Health care infrastructure	15,000
Revenue loss compensating for various tax cuts	7,800

Source: News Reports, Tavaga Research

The relief package was followed by a nationwide address of the Prime Minister of India who declared a COVID relief package of INR 20 lakh crore, which is roughly 10 percent of the country’s GDP. Modi’s package of INR 20 lakh crore included the previously announced measures by the RBI and the Finance Minister. Therefore, after the announcement of the mega stimulus package, the finance minister briefed the allocation of the remainder of the package to be introduced. To understand the flow of packages, refer to the following breakup:

Component	Amount (Rs Crore)
Measures announced by the RBI during Feb-March	8,01,603
March announcement by the Finance Minister – including PMGKAY	1,92,800
Total before PM Modi’s address	9,94,403
FM Announcements post Modi’s address	11,02,650
Total stimulus package	20,97,053

Source: News Reports, Tavaga Research

On June 30, the Prime Minister addressed the nation again and announced the extension of Pradhan Mantri Garib Kalyan Anna Rs (PMGKAY) for a period of five more months, till the end of November 2020. PMGKAY is a scheme that provides free ration for over eighty crore people, and the extension amounted to a cost of Rs 90,000 crore to the Government. The newest relief was over and beyond the mega stimulus announced earlier.

The mega package was announced with the Prime Minister’s initiative of ‘Atmanirbhar Bharat’ – self-sufficient India. The package was more focused on boosting the liquidity, instead of directly incentivizing demand. For example, lowering the repo rate is a liquidity measure but does not guarantee an increase in borrowing as there is no incentive for the bank to disburse loans. After delving into the details of the stimulus package, analysts found out that the actual cost to the Government would be 1 percent of the GDP instead of 10 percent. The cost of approximately Rs 1 lakh crore (approx. 1 percent of the GDP) to the Government would be the result of advance tax refunds, provident fund rebates, and providing cereals and grams for the families.

With the fiscal deficit on an unfavorable trajectory and the risk of downgrades in sovereign rating, the Government cannot afford to directly bear the cost of the relief packages. India’s borrowing target in the current fiscal is Rs 12 lakh crore revised upward from previous estimates of Rs 7.8 lakh crore.

Read about highlights from FM announcements here

The latest in the list of packages

On October 12, the Finance minister introduced further measures of stimulating consumer demand to the extent of Rs 73,000 crores. The following are the measures introduced:

• The federal employees of the Government will be allowed to spend their tax-exempt travel allowances on goods and services, which is a part payment of wages of Government employees in advance
• The Government will increase investments in the infrastructure sector to the tune of Rs 25,000 crores. The funds will be spent on roads, ports, and defense projects
• The Government also announced 50-year loans to the State Governments, free from interest. The amount offered stands at Rs 12,000 crore which is intended for spending on state infrastructure before March 30, 2021

What can we expect from future stimulus packages?

The Government has been holding back on spending directly as the coronavirus cases are still on the rise. The central issue is still to tackle the spread of the virus. The Government has signaled stimulus for opening the economy when they deem the opportunity as ideal, which is basically when the cases of virus subside. Rightly so, it does seem like the right strategy when the country is financially bound to the concerning fiscal deficit. Any expense incurred to stimulate demand will be rendered useless if the coronavirus cases trend continues.

• The finance minister has recognized the need for GST rate revision in the auto sector, solely for two-wheelers. The downward revision will be justified as two-wheelers do not fall under the category of luxury goods
• Further packages will focus on aviation, tourism, and hospitality sectors, which have been hit the most during the pandemic
• Relief is expected for India’s non-salaried middle class and small businessmen
• The next round of relief package is expected to involve a higher direct expenditure compared to the Atmanirbhar package. The package may be composed of an urban jobs scheme, and focus on rural employment while simultaneously aiding farm schemes and direct cash and food transfers.

The idea of further stimulus packages will be to boost consumer confidence ahead of the festive season, which proves to bring the majority of sales for consumer and auto companies. The timing and mode of relief will prove to be a crucial factor.

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