By Hashmat Ali

(Special to India Tomorrow)

NEW DELHI: The Government has announced the package in five tranches and has provided details of how it adds up to Rs 20.97 lack crore and accounts for nearly 10% of the GDP. The circumstances in which it was announced, that is, the destructions of aggregate demand & supply due to covid-19 pandemic, is critical to understand.

 Most predictions pegging the negative GDP growth rate, the global financial major Goldman Sachs estimates a negative GDP growth rate of 3.6%, Another financial major Nomura expects India’s GDP growth rate to fall by negative 5% in 2020.

 Demand & investment side tumbled low at 0.8 percent against 4 percent in the corresponding period of the previous year, economy is doing worse on all the economic parameters including consumption expenditure, both private and government took a hit, while investment growth crashed  downward. Similarly, the growth rate from the supply side measured in terms of gross value added (GVA) is expected to be with 1.3% negative growth rate.

Finance minister said that the package includes the liquidity injected by the RBI and the Garib Kalyan Yojana, will revive the economic growth. But financial firms and credit rating agencies believe the package falls short of 10% GDP and works out to around 1 % and may not be enough to address the large scale destruction caused by the covid-19 across crucial sectors of the economy. The package includes previously announced measures and also monetary stimulus, making the actual fiscal impact of only 1% of GDP, the package does not do much to boost consumption in the short term or provide an immediate boost to demand & supply shocks that could act as a drag on growth, instead , hinges on merely waiting for better times.

The 20 lack crore package of which, measures amounting to 4% of GDP have been undertaken by RBI. Inclusion of liquidity measures by RBI in the package is not like the most packages announced globally. U.S has committed the largest rescue package by any country to 14% of GDP, but it trails behind Japan which announced the package to 21% of its GDP, these packages do not include whatever liquidity their central banks could have injected.

The package of Rs 20 lack crore, only 8.4% of package,  that is, Rs 1.77 lack crore under Garib Kalyan Yojana to impact the fiscal deficit, that is, about 0.9 percent of GDP. The liquidity and credit guarantee measures accounted for three-fourth of the package.

The state governments’ borrowing limit has been raised from 3% to 5% of state gross domestic product with some conditions attached in the package; this will crowd out the poorer states from the borrowing market, a better alternative could be that GST component for the states be given in full.

Anatomy of the package

The Central government’s total expenditure was budgeted at Rs 30 lack crore and the total receipt was pegged at about 22 lack crore, the shortage on receipt side would be financed by market borrowings of 8 lack crore, for that, fiscal deficit was estimated 3.5% of GDP. But due to covid-19’s destruction in aggregate demand and spending, the government borrowed an additional amount of Rs 4 lack crore taking the total borrowings to about Rs 12 lack crore, with fiscal deficit to hit at 5.5% of GDP.

The government expended all the budgeted and additional borrowings in first quarter of this financial year. Borrowings would not be counted as fiscal stimulus, since additional borrowing is being adjusted against the shortfall of tax revenues and disinvestment proceeds. it would have to be a fiscal stimulus were the government provided fiscal expenditure for increasing purchasing power in the economy to boost aggregate demand consumption.  

The fiscal stimulus of Rs 1.77 lack crore could certainly be counted a fiscal stimulus, as the cash is being pumped into rural areas as a part of Garib Kalyan Yojana. The rest is RBI’s liquidity capital of Rs 6.5 lack crore , that is, yet to be translated into incremental credit and currency circulation, to increase  the velocity of cash in currency form.

 The government hopes that enhanced credit flow can be substitute for hard budgetary expenditure in providing the needed push. A large part of the package is really about activating the channels of credit. The Rs 3 lack crore collateral free credit facility for MSME and 20 thousand crore for NBFCs are example. The decision to lend credit lie with banks, however, the banks have limited risk appetite despite their financial position having improved over last three months. Banks wary of bad debts could derail the government’s rescue package for MSME, since whole plan hinges on greater lending by banks, which have so far preferred minor interest from RBI to greater returns from riskier credits. Banks have been parking over 8 lakh crore daily with the RBI at the meager interest rate of 3.75 %.

Collateral free credit facility as well as subordinate debt scheme to MSME are good, but rely significantly on the banking sector as well as the NBFCs to provide the funding. NBFCs too drawing down from their reserves  for making additional provision towards expected credit loss, and against the probability of default due to covid-19 pandemic. Hence, they will shore up their balance sheet against their likely increase in delinquent loans.

Market borrowing

The Centre increased the states’ FRBM limits from 3% to 5%, the states can borrow up to 3.5 % of gross state domestic product (GSDP) without undertaking any reforms, but the remaining will only be available if they move ahead with reforms like implementation of one ration card scheme, bailouts of power distribution companies (DISCOMS), undertaking reforms in urban local bodies and ease of doing business at the grassroots level.

 In this financial year states can borrow up to 5 % of the GSDP, instead of 3 %. This is expected to help them raise an additional Rs 4 lakh crore  in 2020. Interestingly, in April month, 20 state governments together raised Rs 33000 crore, compared to about Rs 27000 crore that all the states had borrowed from the market in one whole year in 2007, just before the global financial crisis set in.

Due to current lockdown, most of the major revenue streams are getting seriously impacted, these revenue channels include Taxies & Duties on liquor, entertainment, registration of vehicles and properties. The states’ fiscal situation aggravated further as GST dues from the Centre aggregating Rs 50,000 crore, not being paid to them as a result spread on state governments’ debt papers is rising from normal 60 basis points to about 160-170 bps; higher borrowings by the states will raise the cost of capital for the private sector.

With cutting in Repo rate and RBI’s TLTROs the 10- year G-Sac  yield fell about to 6.3 %, since Centre borrowing more, Centre‘s  gross borrowing figures is expected to Rs 17 lack crore by the end of the year. This oversupply of bond papers in the second half of the year will limit the downside in bond yields, with  CPI inflation moving past the 8% mark, real interest rates are not expected to go down due to risk-averse banking sector. Hence yield on the 10- year government bonds is likely to be higher.

The debt to GDP ratio must be kept to a suitable target; since it defines the relationship between the governments’ cost of borrowings and economic growth rate. Before covid-19, the stock of debt had been growing at about 7.5% on nominal GDP growth rate of 7%, in other words, the borrowing cost of debt were even higher compared to nominal growth rate.

One can easily think what will happen to the debt to GDP ratio; it will inflate even more than before in the coming years, and it is expected it will balloon towards 90% of GDP from 70% now by the end of this year. It will keep going up in subsequent years, since medium term growth prospects have not been looking goods; real GDP growth rate not beyond of about 5% before three years, the incremental cost of debt and the cost of servicing the incremental debt will go up in coming years. Putting the debt sustainability into danger.

The major chunk of the package may be in the form of credit guarantees and equity infusion that won’t require direct spending and that less likely to support the economy in the near or medium term. It was not clear if the package Aim was to boost the economy or reach the Rs 20 lack crore mark, with several generic announcements which should have been a part of a normal economic agenda, made the entire package Aimless.

(The writer is a research scholar in finance. He can be contacted at [email protected])