Political Economy

Real Cash Outgo Will Determine the Credibility of Modi's Rs 20 Lakh Crore Package

If you remove the RBI's efforts, possible credit guarantees and previous package, what is left for the Centre to deliver is anywhere between Rs 10 lakh crore to Rs 12 lakh crore.

India so far has had the harshest lockdown in the world accompanied by the most measly fiscal support to vulnerable sections of the economy. In fact, the narrative spun by the finance ministry over the past 45 days was that India did not have the resources for a big bang fiscal package similar to those delivered by many developed nations.

Nevertheless Prime Minister Narendra Modi on Tuesday chose to unveil a mega fiscal package of Rs. 20 lakh crore – equivalent to 10% of India’s GDP – even as a more calibrated ‘Lockdown 4.0’ is planned for an as yet indefinite number of weeks from May 17.

Prima facie, the magnitude of the package seems to reflect a desire to compensate for things that have gone horribly wrong these past few weeks – especially the terrible plight of migrant workers and their families, who have been all but abandoned by the Indian state. The details of the package will show how much has really been provided for the impoverished and unorganised working class.

The political optics of the package clearly suggest that Modi wants to be seen as generous in spending as other big countries. This includes the United States, which put together a rescue package of about 13% of GDP.

However, one will have to wait for the package to be unveiled by the finance ministry because the devil is often in the details.

The key element one needs to look out for is how much cash will be dispensed immediately to the most needy sections of society. In an unprecedented economic crisis such as this one, with nearly 25% of the total workforce unemployed and possibly another 25% not certain whether they will get back their jobs, the government has to just focus on how 50% of India’s work force will run their households over the next year as the economy struggles to limp back to normalcy.

India’s total work force is 500 million and Modi’s package must be judged foremost by how it will support half of India’s work force (i.e. 250 million) which is either unemployed or waiting to go back to work, post normalisation.

So the most important element of the package is the immediate cash support to this lot. The support can be either direct cash transfer to the very poor among the unemployed and in the form of incentives to small and micro enterprises to bring many others back to work. This will be critical to generate short term demand in the economy, which will help scale up supply – is down by over 70% across the board in most sectors except healthcare.

The prime minister has said the Rs 20 lakh crore package includes all the liquidity-enhancing measure already announced recently by the RBI. Depending on how you calculate, the central bank’s efforts adds up to roughly Rs 5 lakh crore. It also will include the first relief package aimed at India’s poorest, which was worth Rs 1.7 lakh crore. So what is left for the Centre to deliver is a little over Rs 13 lakh crore.  Of this, MSME minister Nitin Gadkari has said a large amount is already owed by the government – both Centre and state – to small companies in India. Gadkari told CNBC last week that there was such a large amount in outstanding dues from government to the MSME sector that he wouldn’t want to even reveal the figure. One suspects it runs into a few lakh crores, including GST refund dues to exporters. Gadkari said the MSMEs may get guaranteed bank loans against such outstandings. It will be unfair if the government adds this to its relief package because this is money already owed to small businesses.

The package may also draw upon the resources in the control of the states like it did in the first round of fiscal support of 0.8% of GDP. The tax holidays for fresh investments are added to the fiscal package but they do not amount to fresh cash handouts in the immediate future as investments take time to fructify.

One will have to net out all these elements to determine the real extent of fresh funds provided by the Centre for economic revival.

I will be surprised if the fresh cash infusion via fresh borrowings by the government will exceed 3% to 4% of GDP, which works out to Rs 6 Rs 8 lakh crore. So, the Rs 20 lakh crore fiscal package may look huge but in terms of real additional cash flow, the package may turn out to be more modest.