While the government claims it is pump-priming the pandemic stricken economy by a whopping Rs 20.9 lakh crore (10 per cent of the GDP) package, in actual fiscal outgoes, this converts onlyinto a paltry 0.8 per cent of GDP, even though it has hiked the borrowing by a whopping Rs 4.2 lakh crore.
On Sunday, the Centre also allowed states to borrow 2 per cent more of their GSDP with strict reform conditions. Earlier, they were allowed to borrow 3 per cent.
In all, from the total Rs 20.9 lakh package, the immediate fiscal slippage for the Centre will be a modest 0.8 per cent of the GDP, DBS economist Radhika Rao said in a note on Monday.
Considering all the fiscal packages announced till now,the cumulative fiscal slippage is likely to be around 7 per cent of GDP, which is in line with our expectations as the Centre had last week hiked the borrowings by 2 per cent," she said.
States' increased borrowing limit and other factors will potentially take "the overall borrowings to 12 per cent of GDP, she added.
The higher borrowing by states, which are actually spending much more than the Centreon COVID-19 control and management, will involve relaxing the Fiscal Responsibility and Budget Management Act (FRBM) guidelines. This 2 per cent more borrowing will increase their debt issuance by Rs 4.3 lakh crore.
However, this is tied to strict milestones in four key areas --adoption of 'One Nation One Ration Card', reforms of local urban bodies, reforms on power sector distribution companies, and ease of doing business.
Accordingly, the first 0.5 per cent increase (to 3.5 percent) is unconditional, but the next 1 per cent jump will be in four phases, linked to the above reforms being rolled out and if the targets are met in three of the four reforms, the last 0.5 per cent increase kicks in.
Of the Rs 20.9 lakh crore package, as much as Rs 8.1 lakh crore is additional liquidity offered by the RBI since February, and Rs 11 lakh crore or 5.2 per cent of GDP includes credit guarantees worth Rs 3 lakh crore which are outlays that don't add to the fiscal deficit
but are reflected in contingent liabilities and thereby in overall debt.
Lastly, push towards reforms will also not involve near-term disbursements, thus carrying minimal financial impact. In all, the immediate fiscal slippage from these measures will be at 0.8 per cent of GDP.
The bulk of the near-term relief is directed at easing credit unavailability for non-banks and MSMEs, whilst also supporting vulnerable sections, including migrant labourers and street vendors among others.
Further policy support, as and when deemed necessary, is likely to carry an emphasis on financial sector health, including a capital backstop for banks, DBS noted.