Why the stimulus package was imperative?
The Republicans and the Democrats finally reached the much talked about economic stimulus deal worth $900bn. The package basically contains additional relief for small businesses. In addition, there are direct payments to American families that have been hit badly by the pandemic. It is interesting to note that this is the second largest such economic package after the $2.2 trillion Cares Act package in March 2020, at the onset of COVID-19.
The stimulus package was never in doubt as it had to be approved before the Christmas holidays to prevent the US economy coming to a grinding halt. The deal was finally signed by Nancy Pelosi, the Democratic speaker of the House, and Chuck Schumer, the Senate’s top Democrat, just hours ahead of risking a government shutdown.
What does the stimulus package include?
It needs to be remembered that the $900 billion package is a comprehensive package and, inter alia, it also includes allocation for COVID inoculation. Here is what the package contains.
- The first part of the stimulus program is the extension of the Paycheck Protection Program (PPP) worth $285 billion. This is essentially meant for small businesses and also to allocate more money to support distribution of COVID-19 vaccines. With the US FDA approving Moderna vaccines also after Pfizer-BionTech, it calls for higher allocation.
- In addition, the package will also extend the Federal Unemployment Benefits for millions of Americans who lost their jobs in the pandemic. The package in this stimulus will include $600 per individual, $1,200 per married couple and $600 per dependent child. In addition, the US federal government will top-up unemployment insurance by $300 per week up to March 2021.
- There are miscellaneous items like $13bn Supplemental Nutrition Assistance, $25bn for renters and $80bn to help schools and universities conduct lessons in person. There is also a package for small telecom players to strip Huawei and ZTE from their networks.
While the relief package is a global sentiment booster, there are a number of key takeaways for India from the stimulus package.
- The first impact is on US economic growth. There were concerns that if the stimulus package was delayed then the growth for the fourth quarter of 2020 and the first quarter of 2021 could get negatively impacted. That was an area of concern for India as the US is India’s largest trading partner. India also runs a trade surplus with the US, unlike the huge trade deficit that India runs with China.
- The stimulus is good news for US corporates. Like in most countries, even in the US, the larger corporations managed to weather the COVID crisis quite well. The mid-sized and smaller companies have been the most vulnerable. The combination of unemployment allowance for families and support for small businesses means that the overall demand from corporates is likely to remain stable. That is good news for sectors like Information Technology, healthcare and auto ancillaries; that still rely heavily on US markets for sustaining their business models.
- While the US lockdown has never been a reality in the past, the fears of such a lockdown can dry up the flow of risk-on liquidity into emerging markets like India. It must be noted that nearly Rs115,000cr has flowed Indian markets in the last 50 days and that is largely a function of comfortable liquidity conditions in the US. This also means that the flow of funds from passive asset managers into India should continue unabated.
- Finally, the stimulus package also means that the short term concerns over the value of the US dollar are not true any longer. That is evident in the way the US dollar has strengthened in the last few days. The positive takeaway is that the RBI does not have to intervene and expend its currency chest to stop the rupee from strengthening too much. The dollar strength will automatically make the rupee weaker and give a boost to exports.