Large part of FM's stimulus package will work only in medium-term

Madan Sabnavis, chief economist, CARE Ratings (Photo: PHOTO CREDIT: Kamlesh Pednekar)
Finance Minister Nirmala Sitharaman’s new deal as Covid-19 relief is based on three prongs: More guarantees by the government to improve flow of credit to vulnerable and important sectors; direct action when it comes to health; and support for the poor and farming community. These measures are timely and will help alleviate the hardships of the concerned sectors. But these again are supply side measures and not on the demand side. A large part of the package will work only in the medium-term.

The focus on guarantees is quite remarkable as this was launched in a big way last year under the ECLGS scheme, which had disbursed Rs 2.69 trillion. There has been an expansion on this scheme with new schemes for health and other sectors. The MFIs have also been added to this list and there is hence a total of additional Rs 2.675 trillion. The interest rates are lower than the market rate and could range between 7.5% to 8.25% with a three-year term. Guarantees could be for 75% of the amount. This is an effective fiscal tool, where the government takes on the contingent liability without really impacting the budgetary numbers.

Health is the area which is a part (Rs 50,000 crore) of the Rs 1.1 trillion of guarantee being given with a maximum of Rs 100 crore for an entity in non-metro areas. This is quite progressive though it would be interesting to see how many such projects are taken up, given that the new health facilities in the private sector tend to be concentrated in the larger places. It will surely be an incentive to move to these territories to set up facilities.

There are three major expenditures of the government that are outside the budget and will have an impact on the fiscal numbers. These are the higher fertiliser subsidy of Rs 14,775 crore, Rs 93,000 crore of free food for the programme that will run till November and Rs 23,220 crore for health for pediatric purposes. This total of around Rs 1.3 trillion will be around 0.4-0.5% of gross domestic product (GDP), assuming the free food is also accounted for this year (this would have been included in the years when FCI procured the grains). Along with this, the government has also focused on the employment-related scheme where the provident fund contribution by the government would be extended till March 2022. Hence, this has been quite useful for the workers.

There are some medium-term policies relating to exports (insurance), PLI (being extended), power (DISCOMs) and agriculture productivity (New varieties) which will work in the next few years. What is missing, however, is any direct measure on the demand side as this has been the lacunae so far in the Covid relief story. Hence, the revealed ideology appears to be one where the government will be focusing more on giving incentives on the credit side through guarantees as well as direct action for the poor, but will not be revisiting the tax structures for sure. This is significant because high inflation today has been driven partly by the fuel factor where high taxes have exacerbated the situation.

If the credit measures are combined with the measures by the Reserve Bank of India (RBI) for special credit operations for the health sector, we appear to have gotten our priorities right considering that the third wave could come any time.

(Madan Sabnavis is chief economist at CARE Ratings. The views expressed in this article are personal.)

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