Migrant laborers from Bihar wait with their children for for free food during the Covid-19 lockdown, in Kolkata, India, on May 14, 2020. Photo: NurPhoto

Economic stimuli remain the flavor of the season as pandemic Covid-19 forces lockdowns across borders, leaving businesses and economies stalled. 

Following the trillions of dollars worth of stimulus by the US, Japan and European countries, with Japan spending 21% of GDP, and the US 13%, India’s Prime Minister Narendra Modi on Tuesday announced a package of 20 trillion rupees ($265 billion) or 10% of GDP.  

Investors and industrialists had long been seeking a package to help revive the economy, which was grinding down following 51 days of lockdown. Full-year estimates project a flat to negative growth, increasing challenges for a country where more than half its 1.38 billion people live off daily earnings and have little savings for emergencies. 

A pledge of a mega package thus raised expectations. Finance Minister Nirmala Sitharaman over three days unveiled plans and intentions to help entrepreneurs, workers, farmers, traders, shadow banks, electricity distribution companies, and real estate companies. In most of the schemes, the government is a facilitator or is trying to dust off an existing scheme. 

Unlike the US, where Federal Reserve is seeking additional fiscal support for a stronger economic recovery, India has been cautious to keep its spending under control. It is trying to facilitate credit delivery by giving sovereign guarantee for entrepreneurs to borrow. It is seeking to increase access to loans for electricity generation companies, NBFCs, housing finance companies, MSMEs, without having to loosen its own purse strings. 

“This is smart packaging,’’ said Dhananjay Sinha, director research at Systematix Group in Mumbai. “The package doesn’t add much to the fiscal spending. The government has retained expenditure but not increased fresh borrowing for the package.” 

Estimates suggest the government may have to increase its spending by only a miniscule portion. Its focus seems to be mainly in helping opening lines of credit, and giving guarantees for small companies to borrow. 

It set up a 3-trillion rupee fund to assist small businesses, promising to compensate banks if loans went bad, and another 2 trillion rupee fund for 25 million farmers to secure loans at lower interest rates, and created a 300-billion-rupee emergency fund for them. 

It promised free food for the migrant workers for two months. A ration card, which has been in works for more than a year, would help the poor get cheap grain anywhere in the country. But it’ll take another three months to implement.  

Yet, workers who earned nothing over the past two months and returned to their villages, many walking thousands of miles, weren’t helped with any cash in hand. This is seen as major lacunae in the package. 

Measures such as inexpensive rental housing and national ration cards for migrant workers and the urban poor can only be implemented over the longer term. The government has promised to hasten tax refunds, which may have been held back due to inefficiency, and cut immediate provident fund contributions, thereby increasing cash in hand. Experts say the steps are not as meaningful as they appear and are mainly aimed at boosting morale. 

The latest proposals were preceded by government’s measures in March and the central bank’s steps to lower interest rates and opening lines of credit for borrowing by businesses and individuals. Unsurprisingly, there aren’t many borrowers during a lockdown, and banks are holding back money, fearing more bad loans. 

Financial experts say the package is an exercise in unclogging credit flow so that businesses can restart overcoming the impact of lockdowns. Unlike in the US and many European economies, India’s package requires a limited amount of revenue sacrifice by the government and no fresh borrowing. 

“All measures announced to date amount to a fiscal deficit slip of about 0.53% of GDP, by our estimates,’’ Sonal Varma, analyst with Nomura Securities wrote before today’s announcement.

“We believe about 1.8% of GDP worth measures are still in the pipeline as part of PM Modi’s commitment of 10% of GDP announced. We are currently projecting FY21 fiscal deficit at about 7% of GDP and GDP growth at -5.1%.’’ 

The government was stretching its limited capacity to get the best. Overspending or extra borrowing always exposes a government to possible exponential rise in fiscal deficit. India in February projected a fiscal deficit of 3.5% for the full year. Last weekend’s increase in its borrowing for the year by 4.2 trillion rupees was seen as widening the fiscal deficit. 

Unsustainable spending usually triggers a downgrade of sovereign rating, which makes borrowing in global markets expensive and discourages investment. India is on the edge of investment grade and a one-level downgrade will put it in the speculative or junk category.