Lack of direct demand stimulus may jeopardise economic recovery in medium-term: Ind-Ra

Ind-Ra believes an appropriate demand-side measure is as important as supply-side measures.

Jun 01, 2020 01:06 IST India Infoline News Service

India Ratings and Research’s (Ind-Ra) analysis shows that the likely fiscal impact of the INR20.97 trillion economic package in terms of spending over and above the budgeted (such as PM KISAN, MGNREGS wage increase etc.) FY21 expenditure would be only INR2,145 billion. This works out to be 1.1% of GDP. Much of the government support is in the form of credit guarantees and/or credit lines, having minimal impact on the government finances. By choosing to do so India’s economic package is more like the package of Brazil, Germany, France, Italy Japan, Korea, Spain and United Kingdom. Several other countries such as Australia, Canada, China, Indonesia, Mexico, Russia, Saudi Arabia, South Africa, Turkey and United States however have chosen to focus more on spending and revenue measures, to address the fallout of COVID-19 pandemic.

Ind-Ra believes an appropriate demand-side measure is as important as supply-side measures. This is not to say that supply-side issues did not need government support. It indeed was needed especially to restore/augment the supply chain of the economy where micro, small and medium enterprises (MSMEs) play an important role. In this respect the announcements such as INR3 trillion collateral-free automatic loans for MSMEs, INR200 billion subordinate debt for stressed MSMEs with partial guarantee, INR25 billion employees provident fund support for 3 more months, funds of fund with an equity infusion of INR100 billion, releasing of MSME dues within 45 days from the government and public sector undertakings etc. are welcome steps. Also, the liquidity scheme of INR300 billion for non-bank finance companies /housing finance companies/micro finance institutions, INR450 billion partial credit guarantee scheme for non-bank finance companies and INR900 billion package for discoms, additional liquidity of INR2 trillion for farmers through Kisan Credit Card will help in reducing the financial woes building-up in economy due to the lockdown.

However, the near-absence of demand-side measure in the economic package of INR20.97 trillion will jeopardise recovery even in FY22 and FY23 and may even lead to a second round impact on the economy, which means even if the supply side gets restored on account of the various measures announced by the government/Reserve Bank of India, it may soon run into difficulty due to the lack of adequate demand for goods and services. Salary cuts/job losses/reverse migration due to the lockdown have only added to the dwindling consumption demand, already reeling under the reduced income growth of households coupled with a fall in savings and higher leverage over the past few years.

The sudden collapse of private final consumption expenditure growth in FY20 has resulted in a clamour that the FY21 budget must focus on and implement measures that will put more money in the pocket of the people who are at the bottom of the pyramid, to stimulate the consumption demand. However, the budget FY21 fell short on this account, despite fiscal deficit budgeted at 3.5% of GDP. The COVID-19 related lockdown and its impact on economy and livelihoods have only aggravated the sagging consumption demand.

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