Stimulus Package: Targets Economy With An Eye On Fiscal Maths


Taking the cue from Prime Minister’s address to the nation where he outlined his vision of a “Atmanirbhar Bharat”(self-reliant 2.0). The Finance Minister yesterday detailed the much awaited stimulus package.

The PM had earlier mentioned that the package, taken together with earlier announcements by the government and RBI, will amount to Rs 20 lakh crore or equivalent to 10% of GDP. The package will focus on 4 pillars – land, labour, liquidity and laws.

The series of announcements which began yesterday and expected to be spread over a number of days, the finance minister has turned the spotlight on the MSME and NBFC sectors. The package aims at alleviating the pain points of these sectors.

The highlight of the package (announced yesterday):

• Full credit guarantee to be given for lending to MSMEs to the tune of Rs 3 lakh crore.
• The change in definition and threshold for MSME
• NBFCs have been provided an additional Rs 75,000 crore
• Liquidity support to Discoms
• Relief under EPFO and
• Relief for Contractors, real estate companies and tax payers

The Table1 details the breakup of the package announced earlier as well as yesterday. So far nearly Rs 13 lac crore (6.2% of GDP) has been announced. This includes earlier measures taken by the RBI and the government through monetary stimulus and fiscal relief of around Rs 7 lakh crore. The yesterday’s announcement would in the vicinity of Rs 6 lakh crore, the balance Rs 7.1 lac crore (3.4% of GDP) will be spelt out in the coming days by the FM.

Table1: Dateline of the measures announced

The government aims at targeting Liquidity first

The focus of the government is to jump-start the economy via credit transmission of the bank lending especially to the MSME . There is ample liquidity in the Banking system but macroeconomic headwinds coupled with demand destruction has made Bank lending disappear.

The banking system currently has surplus liquidity of around Rs 8 trillion which is parked at a reverse repo rate of 3.75 percent. The government has given Banks a window to earn higher margin on the loans extended to MSME sector. As these loans is being guaranteed by the central government, they will be risk free.

Efficient Banks and NBFC’s having lower cost of funds would be in a better position to gain. This would also crowd out inefficient NBFC’s from this space.

The government also aims to target the job creation via MSME sector, as per the 2015-16 NSS data, this sector created nearly 11 crore jobs. The hope is that cascading effect on the consumption demand for FMCG and automotive sector especially two-wheelers.

Eye on the Fiscal maths

A priori the stimulus package announced looks huge, in fact in terms of percentage of GDP this is the fourth largest in the World. However, the fiscal maths will not be distorted as many of the line items are off-balance sheet. (See Table2)

Table2: The Fiscal picture looks encouraging

While the package announced is huge, the immediate fiscal burden is not. A dive into the various announcement in the last few weeks suggests that out of the total announcements, immediate outflows for the government will be very limited amounting to around 50 basis points of the GDP.

Analysing the total stimulus announced by the government since the start of coronavirus pandemic and the subsequent lockdowns adds up to around 12.5 lakh crore, which is almost 65 percent of the total Rs 20 lakh crore. Already a large portion has come via RBI interventions. Another substantial portion is in the form of bank guarantees.

Thus, by keeping an eye on the fiscal slippage through this package which will be equivalent to 10% of the GDP, India’s sovereign ratings could still remain stable. Putting all criticisms at bay, now the government has thrown the curve ball back at the Banking, Corporate and MSME sector to take up the challenge.

One other factor which will be interesting is what structural reforms are coming which the Prime Minister has already alluded to, that would set course Indian economy on a V-shape recovery trajectory.