You’ve seen the headlines.

“The government has recently announced an economic stimulus package of INR 20000000000000.” (Impressive at first glance)

Its the word ‘ECONOMIC’ that seems to create confusion among people. It’s not a ‘FISCAL’ stimulus that one may be led to believe with phrases like ‘a stimulus that’s 10% of the GDP’. The difference is not at all subtle.

Old things in a shiny wrapper

This package includes monetary measures as well. For instance, immediately after the announcement of lockdown in March Reserve Bank of India had reduced the Repo Rate and Reverse Repo Rate by 75 basis points. It also reduced the Cash Reserve Ratio by 100 basis points, all of which contributed to 3.75 lakh crores of liquidity infusion. It is not money going into the hands of people directly. It is basically a push to commercial banks to park less funds with the Central Bank, borrow more from it and also increase the liquid assets available with them for disbursal. It helps but the change is noticeable over the long term as is not even that effective. Another liquidity measure was announced worth 1.5 lakh crore later in April.

It also includes the 1.7 lakh crore welfare package. Now that was money in the hands of the people. (Fiscal stimulus is highly effective in generating demand and no other measure can match up to that) The government also provided food grains at a subsidised rate to the States under the PMGKY and other direct benefits.

If we add all of this we get around INR 8000000000000. The question now is for the rest of INR 12000000000000.

The Rest

The RBI will further announce liquidity measures. LTRO or Long Term Repo Operations i.e. bond-buying operations (OMO) carried out over a long period. This may take place 1 lakh crore at a time. The banks may provide the MSMEs with refinancing facilities. As of tonight (at the time of writing) some incentives to agriculture and allied sectors are being rolled out. They may also come up with additional working capital and term loans.

Other ways may include long tax breaks to industries and proposals such as full tax exemption to companies making new investment with a minimum limit on sectors like medical devices, telecom equipment, electronics and capital goods.

I mentioned earlier that monetary transmissions are not that effective. One could explain this by looking at this credit easing by RBI. This greater amount available with banks to advance it further to the public may not show up because the banks may simply park these and other funds back with the RBI. According to what we’ve seen so far, the RBI has given a stimulus of 6 lakh crore to the banks. And banks have kept 8.5 lakh crores with the RBI. You can do the math. It won’t be as effective as the government will lead you to believe.

These will not directly impact the government’s finances in the current financial year which brings us to the Why? Why isn’t the government doing more?

Why-o-Why

Frankly, its the best they could have come up with.

We need a demand side measure but all the government can do is give a supply side boost (which may not last long if low AD continues). The thing is we were already in murky waters before the pandemic hit. According to FRBM Act the Fiscal Deficit target should be 3% of GDP to be sustainable. Last Quarter we have had a deficit of around 4.5%. There’s really not much room for the government in terms of the amount of spending it can do. In order to put things in perspective, Fiscal Deficit of Japan, Malaysia and Singapore are 3.1%, 3.2% and 0.7% respectively and their Fiscal Stimulus are 20%, 16.2% and 12.2%. In India the stimulus is around 1% and not 10% that one may believe to be the case.

Moreover, the government had anticipated a revenue of 20 lakh crores, so no it can’t spend all of it and destroy its balance sheet. It has also revised upwards its gross public borrowings by 12 lakh crores (from 7.8 to 12 lakh crores). This move is likely to increase the deficit to 5.5 or even 6%.

All in all, we can hope for a slow recovery. But then again, yes, the immediate help to people dying of hunger; migration and the vulnerable should be provided no matter what and the government definitely needs to be held accountable for that. The Centre has announced that it will spend 3500 crores to provide food grains to migrant workers who don’t have ration cards for the next two months. It’s too little, too late and not universal. Anyways, I’d like to carry a balanced view on this. Let’s see how this turns out.