PM Modi announced a special economic package amounting to Rs 20 lakh crore to deal with the COVID induced economic crisis. This amounts to 10 % of India’s GDP.
[You may read about the first tranche, second tranche, third tranche, fourth tranche and the last tranche of this package]
How does the package compare with other countries?
It is among the largest in the world. As theweek reports:
Based on data compiled by economist Ceyhun Elgin in the COVID-19 Economic Stimulus Index (CESI), Modi’s proposed stimulus package—worth about 10 percent of GDP—would be the fifth-largest among G-20 economies in terms of spending as a percentage of GDP.
Japan leads the list by spending 21.1 percent of GDP on COVID-19 related economic stimulus measures, followed by the United States (13.3 percent), Australia (10.8 percent), and Germany (10.7 percent).
However, among economies as a whole, India’s 20 lakh crore bailout package would tie with Hong Kong at the 19th place.
Is the economic package really worth Rs 20 lakh crores?
The Prime minister clearly mentioned in his address that this package is inclusive of the fiscal package announced earlier and the measures already taken by RBI to infuse liquidity in the economy. Let’s take a look at the break-up of what has already been done:
- FM Nirmala Sitharaman had announced a fiscal package of Rs.1.7 lakh crore on 27th March
- The RBI undertook liquidity measures in February 2020 amounting to Rs.1 lakh crores. [You may read: What is LTRO?]
- The RBI announced a slew of measures on 27th March to unleash liquidity worth Rs.3.74 lakh crores. [You may read: RBI cuts rates to mitigate COVID-19 impact]
- Then, on 17th April, RBI announced additional measures worth Rs.1 lakh crore. [You may read: RBI takes measures to mitigate COVID-19 impact]
- On 27th April, RBI announced an Rs. 50,000 crores special liquidity facility for mutual funds. [You may read: Everything you wanted to know about the Franklin Templeton crisis]
- If we add all the above, we get Rs.7.94 lakh crore. So, 7.94 lakh crore out of 20 lakh crore has already beenaccounted for in the earlier measures.
- The balance is 12.06 lakh crore.
Even Rs. 12.06 lakh crore is a huge amount. So, naturally, the next question that arises is
How will the Government raise such a huge amount?
Rs.12.06 lakh crore doesn’t mean an equivalent amount of cash outlay for the Government. Also, it could be spread over the years.
Besides, the Government has already announced an increase in borrowings program for the year 2020-21 from 7.8 lakh crore to 12 lakh crore. The increment is 4.2 lakh crores. And, the Indian Express has reported that sources familiar with discussions within the government said the additional fiscal outgo may not be more than Rs 4.2 lakh crore during the year.
Let us first have a look at the first fiscal package worth Rs.1.7 lakh crore announced in March
In the first fiscal package of March 27, money transfers immediately effected would add up to only Rs 61,380 crore over the next three months: Women Jan Dhan account holders – Rs 10,000 crore; widows, elders, and the disabled – Rs 3,000 crore; farmers – Rs 17,380 crore; and, building and construction workers – Rs 31,000 crore.
Source: Indian Express
Moreover, some of the expenditure had already been incorporated into the budget. The outlay of Rs.17830 crore for farmers was already budgeted under the PM KISAN scheme (which provided Rs.6000 per farmer annually). The payment of Rs.2000 out of the budgeted Rs.6000 was front-loaded to provide a total sum of Rs.17830 crore to farmers.
The amount paid to the building and construction workers came from a welfare fund maintained by states and UTs. Under the Building and Other Construction Workers’ Welfare Cess Act, 1996, the states collect 1 % cess on the cost of construction.
[You may read: Why was there an exodus of migrants from cities to villages?]
The increase in wages of MGNREGA workers (also announced in the package) was also included in the budget. This was done to link wages with the consumer-price index.
[You may read: Inflation Demystified]
Some calculations suggest that all these measures had increased the government expenditure for 2020-21 in the range of Rs 1 lakh crore. (as compared to the package Rs.1.7 lakh crore).
Reworking of existing schemes is just one aspect. Even if the Government provides measures such as loan guarantees, there will not be an equivalent outlay. It will give confidence to the banks to lend more without imposing an equivalent burden on finances.
Therefore, we should concentrate more on the details of the package as well as the structural reforms that the Government is expected to take, rather than getting carried away by the number of zeros in 20 lakh crore.
All said, if the Government is unable to meet the increased expenditure requirements, it is considering several options to finance the deficit. One of them is to ask the central bank to print more money.
[You may read: What is debt monetisation or printing of money?]
Note: Finance Minister has announced the details of the package. We’ll talk about it tomorrow.
Economyria is now on Telegram. For a simplified analysis of topics related to economy/ business/ finance, subscribe to Economyria on Telegram
Q1. Why is the package always in terms of percentage of the GDP?
Q2. Given the population of India, GDP per capita for India is lesser than some other countries. So isn’t the package very less compared to other countries?
This is because everything is relative. We cannot compare packages between different countries or even within a country in different time periods in absolute terms. Besides all economic parameters like fiscal deficit, debt, revenue, etc are expressed as percentage of GDP. It facilitates comparison across time. To put things into perspective, in 1991, India must have had a lesser current account deficit than 2019 in absolute terms. In absolute terms, a small country will take lesser debt, have a lesser fiscal deficit, lesser revenue, and so on. To put it even more simply, if your father earned a lesser salary than you when he was 25, it doesn’t mean he actually earned less. You will need a basis of comparison like cost of living, expenditure as proportion of income, etc.
GDP per capita is another way to make the comparison, but GDP is considered an acceptable parameter. Like we can rank countries based on Nominal GDP, PPP GDP, real GDP, or per capita GDP. Each will tell us different things about the economy. We could even make a holistic analysis including all these variables.
Earlier the government was worried about credit downgrading because of large fiscal stimulus. Could you please elaborate upon this.
As I have mentioned, the direct fiscal cost to the Government would be lesser. Also, the Government has no option but to provide fiscal stimulus to the economy to tackle the fall-out of the pandemic.
A detailed article as usual . However I still have doubts on how the Government will finance such large amount.Borrowing figure seems insufficient .
What other tools is the Government using ? Further what more can be used for the same . I would be grateful if these could be answered
Regards
//Rs.12.06 lakh crore doesn’t mean an equivalent amount of cash outlay for the Government. Besides, the Government has already announced an increase in borrowings program for the year 2020-21 from 7.8 lakh crore to 12 lakh crore. The increment is 4.2 lakh crores.//
The actual fiscal impact of the Modi’s 20 crore economic package is expected to be around 1,65,400 to 2,43,650 crore.
This is the line with the additional borrowing by the Government. So, until now, the Government is not using any other tools. The Government can either borrow from internal/ external sources or print money to finance its deficit. You may read: What is debt monetisation?