Stimulus 2.0 – Rs20 trillion and still counting

The actual contours of Stimulus 2.0 only became clear on May 13, when Nirmala Sitharaman laid out the specifics of the package post the PM announcing it on May 12.

May 14, 2020 08:05 IST India Infoline News Service

On May 12, 2020, the Prime Minister had announced that the government would roll out an economic stimulus package to revive output and consumption to coincide with Lockdown 4.0. The actual contours of Stimulus 2.0 only became clear on May 13, when Nirmala Sitharaman laid out the specifics of the package. Before we get into the nuances of the actual announcements, let us first put the amount of Rs20trn in perspective. It is not like the government is going to cut a cheque for the amount and transfer it to the stakeholders in the economy. It is the sum total of all the monetary and fiscal measures announced by the government and RBI since March 2020.

What is this Rs20trn package all about?
To begin with the Rs20trn package is the aggregate of all monetary and fiscal facilitation since March third week. This is how the break of Rs20trn could approximately look like.
Particulars of the Stimulus Amount (Rs. in trillion) As % of GDP
Monetary Measures done by RBI
LTRO / TLTRO completed 2.50 1.30%
CRR Cut effected 1.37 0.70%
SLF-MF Special Window 0.50 0.30%
MSF / OMO borrowings 1.37 0.70%
RBI Stimulus completed 5.74 2.90% of GDP
Monetary Measures to be done by RBI
MSF / OMOs / loan moratorium 4.56 2.3%
RBI Stimulus pending 4.56 2.30% of GDP
Total stimulus from RBI (A) 10.30 5.20% of GDP
Fiscal package announced 27 March 1.70 0.90% of GDP
Fiscal measures likely
Tax breaks 1.00 0.50%
DBT / NREGA 1.00 0.50%
Bad Bank / recapitalization 1.00 0.50%
Guarantees / Counter guarantees 5.00 2.50%
Fiscal stimulus pending 8.00 4.00%
Total Fiscal stimulus from FM (B) 9.70 4.90% of GDP

If you add up the fiscal and monetary stimulus, you get Rs20trn, which is roughly 10.1% of the GDP. The overall package is split equally between monetary and fiscal stimulus, which is fair game in a macroeconomic scenario where both the levers need to be utilized. But is Rs20trn sufficient in the Indian context?

We need to put the spending in context. For example, the world is spending $15 trillion on stimulating economies. That is roughly about 16% of world GDP. In the Indian context, the overall stimulus is about 10.1% of GDP. That is, in itself, creditable since India has major constraints with reference to fiscal deficit and sovereign ratings.

What are the key stimulus announcements made by the FM?
In her press conference, Nirmala Sitharaman dwelt on two points. Firstly, this was not the end of the stimulus and the government had the leeway to expand the ambit. Secondly, the stimulus package would pan out over a period of time with specific areas being addressed on a regular basis. Here are some of the key takeaways from her press conference.
  • MSMEs to be given collateral free loans for a period of 4 years with moratorium of 1 year. No guarantees would be required.
  • In addition, stressed MSMEs will get to raise Rs20,000cr of subordinated and a special equity infusion via Fund of Funds (FOF) up to Rs50,000cr for viable MSMEs.
  • Limits for classification as MSME hiked five-fold across micro, small and medium categories to expand the MSME benefits to more units.
  • All MSME receivables from the government, Central Public Sector Undertakings (CPSE) and government departments to be cleared in 45 days.
  • In a first step towards “India First”, all government tenders up to Rs200cr to bar any foreign bidding and to be reserved for domestic business units only.
  • Further tweaks for Employee Provident Funds. Statutory deposit limit cut from 12% to 10% for next 3 months and government to pay EPF contributions till August.
  • Special liquidity scheme worth Rs30,000cr to cover NBFCs, HFCs and MFIs. In addition, Rs45,000cr partial credit guarantee scheme also offered for NBFCs.
  • A sum of Rs90,000cr to be infused for improving liquidity of DISCOMS and such monies to be paid by REC and PFC, India’s principal power financiers.
  • COVID-19 to be treated as Force Majeure event and all realty project registration and completion extended by 6 months.
  • On the direct tax front, TDS rates reduced by 25% across the board for non-salaried residents and all non-corporate refunds to be cleared immediately.
  • Filing dates for tax returns extended from July 31st till November 30th. Even filing dates for audit cases extended till November 30th.
  • The Vivad se Vishwas scheme has been extended till December 31 where payments can be made without additional amounts.
In a nutshell, not all measures may have immediate financial implications and some may even be in the form of procedural simplification. If the stock market response is any indication, markets are clearly delighted that the government has made the economy the nucleus of its policy. For the stock markets, that is worth its weight in gold!

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