Here is how leading brokerages have interpreted the developments.
Considering COVID-19 is first a supply shock and then a demand shock, we believe fiscal policy measures could be more effective than monetary policy to support the economy at the current juncture.Given the already stretched government's balance sheet, we believe a considerable amount could be directed towards bank guarantees to 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. We maintain our view that fiscal stimulus in FY21 will remain well below 5% of GDP.
The incremental announcements' values are also likely to be a 'gross number' i.e. there will be items such as expenditure reallocations, creditguarantee schemes and possibly more measures from the RBI. The government has already raised its borrowing program and taken the key revenue measure of hiking auto-fuel duties (around 80bps of GDP) which should partly help fund the economic package.
We interpret the PM's comments to mean that previous steps taken by the Reserve Bank of India (RBI) and packages announced by the government are included in the overall stimulus figure. This means that Rs 9 trillion of total measures have already been undertaken, and there is space for another Rs 10.7 trillion of spending/support, which needs to be clarified. From additional borrowing announced and fuel taxes delivered, we estimate the total on-balance sheet spending capacity is close to Rs 1.9trillion, accounting for our revenue loss estimates of Rs 3.1 trillion.
PM Modi indicated several times that India needs to be “self-reliant”, invoking the material increase in Covid-19 related production for health and protection equipment as a measure of domestic manufacturing. This is a trend which has persisted for the last few quarters, and has led to major custom duty hikes in recent years. We believe more measures to invert duty structures to protect and promote domestic manufacturing might be on the anvil, but we await more clarity. Self-reliance is a big theme in today’s speech, and may indicate more protectionist tendencies.
Overall, the government’s measures to undertake changes on land, labour and laws and to provide liquidity appear large and should support sentiment. A lot of these changes would require material Centre-State coordination, and this could pave the way for larger spending reforms, including GST simplification and Centre-State revenue distribution.
While we have been awaiting the second fiscal package, the size is much larger than was anticipated, especially as additional borrowing for this year was announced over the weekend and pegged at 2 per cent of gross domestic product (GDP). That said, one needs to be careful about extrapolating whether the 10 per cent of GDP will be fresh stimulus for the economy, because no details are available yet. The Prime Minister noted that the package would focus on land, labour, liquidity and laws. He also noted that it would be aimed at labourers, farmers, honest tax payers, small and medium enterprises and cottage industry.
Details are expected to be made available by the Finance Minister and RBI Governor from tomorrow onwards. The 10 per cent of GDP package is likely to subsume the first announcement of about 0.8 per cent of GDP but it’s not clear whether it includes: (i) liquidity measures already announced by the RBI that amount to about 2.5 per cent of GDP – which is likely given the reference to liquidity in the PM’s statement; (ii) how much of this is a credit guarantee scheme versus fresh spending; and (iii) whether existing spending will be re-purposed for this package. Therefore, there is no way to tell yet how much of this will translate into additional spending from the budget in the form of fresh stimulus.
The fiscal package announced by the government is way above our expectations of 1.1-1.2 per cent of GDP. The PM mentioned that the package will include measures for farmers and labour, address difficulties being faced by businesses as well as medium and small enterprises (MSMEs), and cater to the needs of middle-class people. Although it was not clear from the speech and details are not available yet, it seems that the package announced on Tuesday could include some previous economic measures taken by the government and the central bank to deal with the crisis. The PM urged greater consumption of local products, which will strengthen the Make in India movement. He also mentioned that the government is focusing on land and labour reforms to revive the economy and get investment. FM will provide details on the fiscal package on May 13.