Govt's Rs 20-trillion financial package: It's the policy shift, stupid

PM Narendra Modi identified five broad categories which the Rs 20-trillion package would help
It was quite natural for anyone listening to Prime Minister Narendra Modi’s address on Tuesday to be focused primarily on his announcement of the headline number of Rs 20 trillion as the much-awaited package to alleviate the adverse impact of Covid-19 on the economy and the people. A Rs 20-trillion package is big, and coming as it was after more than 45 days of wait since the last big packages from Finance Minister Nirmala Sitharaman and the Reserve Bank of India (RBI), there was instant jubilation over the size of the stimulus.


But an equally important message in Mr Modi’s announcement on Tuesday lay somewhere else. And that pertains to the significant shift in India’s economic policy that the prime minister is hoping to engineer in the coming days. Taking advantage of the crisis brought about by Covid-19, Mr Modi has created a new rationale for rebuilding the Indian economy on the basis of self-reliance and selective reforms in key sectors.


Note that the announcement of the Rs 20-trillion package came against the backdrop of his economic strategy of pursuing self-reliance. In other words, it did appear that the package would be rolled out on the premise of the Indian economy strengthening the pillars of self-reliance that he outlined before unveiling the package amount.


The policy shift will undoubtedly have serious implications for the Indian industry, trade, foreign investment and consumers. But let us first understand how large is Mr Modi's stimulus package.


Additionality in stimulus is Rs 11-13.3 trillion


Several analysts have noted how the actual additional amount of the package will be much less than Rs 20 trillion. Barclays believes that Rs 9 trillion has already been pumped in through earlier packages announced by Ms Sitharaman and RBI Governor Shaktikanta Das. The additional amount would thus be only Rs 11 trillion. JP Morgan has calculated that apart from Rs 1.7 trillion announced by the finance minister, the RBI package was equal to about 2.5 per cent of gross domestic product (GDP) or about Rs 5 trillion. Therefore, the additional amount, according to JP Morgan, would be Rs 13.3 trillion.


Thus, what the markets can expect by way of additionality after Mr Modi’s package is implemented in the coming days could range between Rs 11 trillion and Rs 13.3 trillion. The size of the total package would perhaps be a little more than the promised 10 per cent of GDP, if one assumes that the Indian economy could contract by about 3 per cent in 2020-21. It could be 10.15 per cent of GDP.


This stimulus could come in two ways – a part through extra spending and the remaining as a result of forgone revenues on account of tax cuts. What is now unclear is how much of the stimulus would come by way of additional expenditure, facilitated by the extra borrowing of Rs 4.2 trillion planned by the government, and how much would come by way of tax concessions.


What will be the size of the fiscal deficit? Nobody has an idea, except that a target of 3.5 per cent of GDP for 2020-21 is right now a dream, and a starting point for making such an estimate could be to assume a figure close to double that deficit level. A lot, however, depends on what the tax concessions are going to be like and how the revenue numbers will look by the end of the year. This will become clearer in the coming days.


Who will be the key beneficiaries of the package?


A guesswork on who would be the main beneficiaries of the package can be undertaken by looking at the sectors that Mr Modi identified as the key targets of the stimulus. The prime minister mentioned five broad categories which the package would help – cottage industries, small and medium enterprises, workers and farmers, middle-class tax-paying people, and industries.


It is safe to assume that a major financial assistance scheme could await the micro, small and medium enterprises (MSME) sector. There could be a bigger and more generous cash transfer scheme for farmers and workers. But for middle-class tax-payers and industries, there could be some tax concessions, which will result in a revenue loss for the government.


It is not yet clear if the package will contain any reduction or rationalisation in the rates of the goods and services tax (GST). These decisions will have to be taken at a meeting of the GST Council.


Will the package also contain some measures to mobilise revenues by taxing the high-networth individuals or large companies or imports? Increases in import tariffs are likely, given the new focus on self-reliance. The government needs resources to finance the huge financial stimulus of Rs 20 trillion. One should not be surprised, if the government seeks recourse to such additional taxes, something on the lines of a Covid levy, even for a temporary period of time.


Policy shift towards self-reliance & some reforms


Mr Modi’s emphasis on building a self-reliant India came initially in one of his earlier interactions through a video conference with state chief ministers. Then, it was merely a mention of self-reliance. But on Tuesday, Mr Modi expanded his ideas on self-reliance. He believed that the Covid-19 pandemic was a crisis with an opportunity and that opportunity was to build India as a self-reliant country.


What did the prime minister mean by a self-reliant country? He clarified that self-reliance was not about being self-centred. As one of the government officials later clarified, it did not mean shutting the country off from global supply chains. Elaborating further, Mr Modi said that the idea of self-reliance would incorporate the needs of a globalised world.


He identified five pillars of a self-reliant India. These were: a vibrant and rapidly changing economy, building of modern infrastructure, setting up systems that are technology-driven, enhancing demographic skills and capacity, and strengthening the supply chains to meet growing demand in the economy. The goals of building a self-reliant India also meant greater focus on local manufacturing, local markets and local supply chains, he explained.


The dangers of a self-reliant India becoming protectionist loom quite large. How the government negotiates the difficult turns and twists of such a policy shift will be closely watched by all stakeholders in the Indian economy. Foreign companies may wonder what this means for fresh foreign capital infusion in the current or new ventures that they may have in mind. Domestic industries, usually scared of competition, may see in this some extra safety in a protected market, with increases in import tariffs becoming more widespread and steep. Consumers may be worried that their choices of goods and services in the marketplace could be fewer.


The prime minister’s address also identified some reforms that would be undertaken in the coming days. The economic package, he said, would look at reforms in the areas of land, labour, liquidity and laws. More clarity is awaited on what these reforms would entail. He also talked about the need for strengthening supply chains for farmers, rationalising the tax system, building the infrastructure sector, attracting more investment and providing more incentives to industry.


The announcement of the Rs 20-trillion package on Tuesday has already secured one major optical benefit for the government. The large size of the package has drawn towards itself almost all media attention, crowding out the dismal show on the industrial output front, also announced on Tuesday. The index of industrial production for March shrank by 16.7 per cent. This was a month which suffered the impact of the lockdown only for a week. Clearly, worse news on economic output might come in the next couple of months. The Rs 20-trillion package on Tuesday came not a day too soon!

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