The Indian economy is finally showing signs of recovery, as the country reels out of the nation-wide lockdown gradually and cautiously. The government of India has announced several measures during the various unlock phases in order to sustain the economy from the perils of a sudden knock down by the covid19 pandemic. The most recent stimulus came with various direct and indirect measures to gear up the stagnating economy coinciding with the generally positive mood of the people of India during the festival of light!
Not only that the timing of the stimulus is very apt but also the design of the stimulus package is such that it will usher into positive gains for the Indian economy enhancing both aggregate demand and aggregate supply. It is likely that the Indian economy may reach an equilibrium at a level higher than what was projected by several agencies based on the pre-stimulus trend.
No wonder, Moody’s has also probably noticed upsurge in the Indian economy, and so it now says that not only that the Indian economy will shrink by a lesser rate (8.96 per cent) than what it envisaged earlier (9.6 per cent) but it will also grow by a higher rate (8.6 per cent) in the calendar year 2021 than what it had projected earlier (8.1 per cent).
What is special in the Stimulus 3.0?
Firstly, the government has announced a new version of the previously launched MSME specific Rs. 3 lakh crore guaranteed loan programme (ECLGS 1.0) by enhancing its arena to accommodate 27 stressed sectors badly hurt by the covid-19 pandemic. Under Emergency Credit Line Guarantee Scheme (ECLGS 2.0), the healthcare sector and the other 26 stressed sectors, having a credit outstanding of above Rs. 50 crore and upto Rs. 500 crore as of February 29, will be eligible to get up to 20% additional collateral free with official guarantee. This is another gain without pain sort of measure by the government to roll over the ECLGS 2.0 without raising the erstwhile cap of Rs. 3 lakh crore as about one third of this limit is yet to be exhausted. The sectors under this category include power, construction, iron and steel, roads, real estate, wholesale trading, consumer durable, aviation, logistics, hotels, restaurants and tourism and mining which we were reportedly hit hard due to country wide mass lock down as well as the resultant mass exodus of the labour to their home towns.
Secondly, the scope of Rs. 1.46 lakh crore production-linked incentive (PLI) scheme has been widened to now cover ten sectors (increased from 3 earlier) to boost manufacturing base and increase exports which have dwindled a bit of late. The scheme seems to be based on an old paradigm that supply creates its own demand.
Thirdly, the government has announced relief measures in the form of tax sops to help the developers which is likely to encourage the home buyers to consider a buy sometime in near future as the relief is likely to continue only till June 30, 2021. This benefit is specifically made available to houses with prices of upto Rs. 2 crore and only for primary sales. Such experiments in the fiscal stimulus can be considered as novel as the government is giving tacit support to the builders to clear out their inventories on one hand and aiming at revival of demand for consumer durables on the other hand.
The tax sop involves increase in the threshold limit of the difference between the circle rate and the transaction value from existing 10% to 20% which triggers the need to pay taxes for both the home buyers and the developers . Somehow the government seems to be looking for macroeconomic solutions as well while implementing the stimulus at the micro or industry level.
Creation of Jobs is the most important issue
Unemployment problem has been a major side effect of the Covid-19 pandemic syndrome. The covid-19 recovery rates have been consistently rising in India. Recently it has been reported to be around 93%. Unfortunately the recovery rate of economic activity is nothing close to that figure. Moreover, a suitable vaccine is yet to be made available on mass scale. The damage inflicted by the sudden mass lockdown measures and panic driven psychosis has caused wide spread damage to the covid-19 affected economies. Unfortunately, the Indian economy was no exception either. The economy has shrinked by 23.9 percent in the first quarter of this fiscal. Yet the persistent efforts from the central and several state governments and a little support from the upsurge in the agricultural growth rate are keeping the show go on.
Recovery in the economic activity is slow but the good news is that the deceleration rate is shrinking in the case of many sectors. Now the finance minister has thought of giving incentives for the job creation by earmarking Rs. 16000 crores of which Rs. 10000 crore are to be routed through rural employment generation schemes (PM Garib Kalyan Rozgar Yojana ) and the remaining Rs. 6000 crore to be provided for subsidizing mandatory contributions by firms and workers towards employees’ provident funds (EPF). The government is to bear full EPFO contribution (i.e., 24 per cent of the basic pay ) for eligible staff/units for 2 years and half the cost for the bigger units employing more than 1000 workers. The scheme is expected to cover 65% of employees and 95% of establishments in the formal sector This is going to raise the disposable income in the hands of the workers and benefit the eligible units as well.
Stimulus 3.0 : a multi-pronged strategy
The other measures announced by the government include:
- Allocation of Rs. 18000 crore for PM Awas Yojna (urban)
- Provision for equity infusion of Rs. 6000 crore at the NIIF debt platform
- Provision of Rs. 3000 crore for EXIM Bank
- Additional allocation to the tune of Rs. 10,200 crore for capital/industrial spending
- Earmarking Rs. 900 crore for R&D on covid-19 vaccine
- Reduction in the performance security on government contracts in construction being only 3% now
- Additional allocation of Rs. 65000 towards fertilizer subsidy in the fiscal year 2021.
The size of the stimulus dose matters after all
With the recent economic stimulus of Rs. 2.65 lakh crore, the size of the overall government stimulus is reported to be around Rs. 29.87 lakh crore which is 15% of the GDP of which government’s contribution is reported to be about 9%. It is important to note that the government is faced with the dilemma of need to give larger and directly penetrating stimulus doses to recover from the covid-19 pandemic effects on one hand and the need to keep fiscal balance on the other.
The Debt to GDP ratio is projected to reach 91% for the first time after 1980. However, prudence in government spending may only counter the expansionary macro policies and so the government may have to constantly think of ways by which the revenues increase somehow to at least the budget estimate levels. In the meantime, the GST collections in the month of October have increased to Rs. 105155 crore having crossed the golden benchmark of Rs. 100000 crore. This is not only the highest in this fiscal but much higher than Rs. 95379 crore in the corresponding period in the last year (2019-20).
Given the timing and penetration of the economic stimulus, we may call it a strategic move by the government particularly coinciding with the festival of lights in India. The measures announced under the stimulus will extend the much needed strategic support to the sectors most stressed out due to the onslaught of the covid19 pandemic and help the growth rate gain momentum in the medium to long term.