13 May 2020
New Delhi: The fiscal package to be announced by the Centre on Wednesday would be 5 per cent of the GDP and a part of the same could be a restatement of the existing schemes, according to a research conducted by US-based financial services firm Jefferies.
The research said that the headline number of the gross fiscal package of Rs 20 trillion or 10 per cent of the GDP is impressive.
"We estimate that a part of this package (5 per cent of GDP) is already under implementation through RBI's pre-announced liquidity measures and a mini package announced by the government," Jefferies said.
"The research said that the incremental package would be 5 per cent plus of the GDP. A part of the same could be a restatement of the existing schemes," it said.
Union Finance Minister Nirmala Sitharaman is slated to announce the details of the fiscal package at 4 p.m. (IST) on Wednesday.
Prime Minister Narendra Modi on Tuesday evening mentioned that the Rs 20 trillion packages will include the already announced measures by the Finance Minister (Rs 1.7 trillion/0.9 percentage point) and those by the RBI (Rs 8.0 trillion/4.0 percentage point).
This leaves a space of Rs 10 trillion or 5 per cent of the GDP for incremental announcements.
"The incremental announcements' values are also likely to be a 'gross number', i.e., there will be items such as expenditure reallocations, credit guarantee schemes and possibly more measures from the RBI. We note that the first fiscal package announced had only about 60 per cent (Rs 0.9 trillion) as new spending, the rest being re-allocation," the research said.
The government has already raised its borrowing programme by 2.0 percentage point (ppt) of GDP and taken the key revenue measure of hiking auto-fuel duties (80 bps of GDP) which should partly help fund the economic package.
Modi also mentioned that a new 'Lockdown 4.0' will be announced from May 18 but with likely substantial modification/relaxation to the existing rules. Railway passenger trains have already started functioning on limited routes.
The Prime Minister mentioned that the focus of government support will be on the MSME and agricultural sectors. "Finally, Modi's mention of making structural reforms is interesting. He targets reforms in land, labour, capital and laws going ahead," the research said.
Interestingly, a few states such as Uttar Pradesh, Madhya Pradesh, Gujarat etc. have already made some labour law reforms such as freezing major labour law applicability for a few years, which give the industries more flexibility in hiring and firing employees, determining their wages, and reducing their liabilities in terms of providing employee benefits.
J.P. Morgan said in a research note that the headline stimulus number is ahead of the market's expectations, but "we await details to discern its ability to drive a quicker growth recovery than our expectations".
It noted that stimulus is key to support the economy, but the devil will be in the details. Considering that Covid-19 is first a supply shock and then a demand shock, fiscal policy measures could be more effective than monetary policy to support the economy at the current juncture, it said.
The combined support announced by both the RBI and the government till date has been to the tune of Rs 7 trillion (3.4 per cent of GDP). The remaining Rs 13 trillion (6.2 per cent of GDP) is now the policy space left.
"Considering the already stretched government's balance sheet, we believe a considerable amount could be directed towards bank guarantees to the SME/MSME sector, refinance facilities and long-term tax breaks for industries (to boost manufacturing).
Any amount allocated towards say a credit guarantee fund will add to the government's contingent liabilities (and possibly to public debt levels) but will not worsen India's fiscal deficit calculations", it said.
"We maintain our view that fiscal stimulus in FY21 will remain well below 5 per cent of GDP. Focus on reforms could help support India's potential growth to above 6 per cent. We have been highlighting that India's long-term growth could slow to 5 per cent YoY under alternate risk scenarios (Covid-19 related disruptions lasting longer), compared to 6-6.5 per cent in our base case," it added.
To create a virtuous cycle of higher potential growth, reform momentum would need to pick up. "We believe there is a golden opportunity for India to gain market share in the global export basket as Covid-19 increases relocation intentions," J.P. Morgan said.