Stimulus of barely 2% of GDP offset by spending rejig

The stimulus 3.0 unveiled on Thursday notionally involves a maximum budgetary cost of Rs 1.5 lakh crore or thereabouts in FY21, but the actual outgo is seen to be much less. Together with the Rs 2.4-2.5 lakh crore outer limit for the combined size of the first two stimulus tranches, the government endeavours to spend less than Rs 4 lakh crore or just about 2% of the gross domestic product (GDP) on the special schemes to resuscitate the pandemic-ravaged economy.

That is still below the average ‘fiscal’ stimuli size of 2.5% of GDP announced by countries which have been similarly rated by Moody’s (Baa3, lowest investment grade), let alone the advanced economies or the G-20 brethren.

This is even as the IMF has predicted the country’s economy to contract by a record 10% in FY21; RBI has recently stated that India’s GDP would shrink 8.6% in the September quarter, following the 23.9% contraction in Q1, which was the sharpest among G-20 countries.

Of course, more stimulus measures might be in the offing, but the Centre’s Budget size for FY21 may not still exceed the Rs 30.4 lakh crore estimated, as the expenditure control measures being enforced are leading to considerable savings (an estimated Rs 4 lakh crore in the April-December period alone). It has been a massive expenditure rejig, rather than fiscal expansion, so to speak.

Since all stimulus schemes are demand-driven and spending decisions are prone to bureaucratic evaluations and vetting, the actual stimulus spending could turn out to be less than envisaged. For schemes that are to run for over a year (the five-year production-linked incentive scheme to boost manufacturing and exports, for instance), the remainder of the current fiscal is unlikely to witness spending that corresponds to a full year.

Finance minister Nirmala Sitharaman on Thursday said the steps taken so far, including the monetary measures of RBI to boost credit flows and systemic liquidity, are worth close to Rs 30 lakh crore or 15% of GDP. The government’s steps alone have been worth Rs 17.2 lakh crore or 9% of GDP, she said. But that involves many existing schemes, whose costs had been included in the original Budget projections. Schemes that are to run for several years and private investments/spending that the government intends to spur and facilitate via assorted incentives are also part of the government’s estimate of the stimulus.

A Rs 65,000-crore additional outlay for fertiliser subsidy, over and above Rs 71,309 crore budgeted, is the largest budgetary component of the stimulus 3.0. This will ensure that entire subsidy dues to the fertiliser companies, including Rs 48,000-crore arrears, will be cleared in the current fiscal. This is an unprecedented step, as a major part of subsidy for any year used to be released in the subsequent year/s, leading to liquidity problems for the fertiliser industry and shortage of fertilisers in many parts of the country. Given the agitation over the farm Bills, and the fact that the agriculture sector is proving to be silver lining on the cloud of economic slump, the government can’t afford paucity of fertilisers in the rabi season.

The government still has some room for unveiling more stimuli, even without altering the estimated budget size for the year or the enhanced gross borrowing limit of Rs 12 lakh crore. Analysts have projected the Centre’s fiscal deficit in FY21 to be 7-8% of GDP compared with 3.5% budgeted. A big dose of stimulus will require the deficit to widen even beyond this level. Apparently, the government doesn’t want that to happen and prefers to keep stimulus within a certain limit.

Batting for ‘additional’ fiscal spending, chief economic adviser Krishnamurthy Subramanian said recently: “At this juncture, returning to the high-growth trajectory gets priority over fiscal balance. As such, even in the past, a rating downgrade didn’t quite impact India’s financial system.”

Of course, even though the Centre’s budget capex declined 12% on year in H1FY21 and its overall spending was flat, the government has scaled up the estimated capex for the year to Rs 4.4 lakh crore, from a little over Rs 4 lakh crore budgeted (on Thursday, a Rs 10,200-crore additional capital/infra spending with a focus on defence equipment/green energy has been announced). Additionally, efforts are being made to avoid a big slippage in state governments’ capital expenditure (Rs 12,000 crore is being offered to states as 50-year soft loan) and CPSEs are nudged to invest as much as they can.

According to an FE review of budgetary spending by 14 states, in April-September this year, their capex was down 22% on year; considering that the combined capex by all states was budgeted to increase by 31% on year in FY21, the slippage in state capex from the budget target is sure to have been unprecedentedly steep in the Covid-ravaged first half. The pandemic has worsened their fiscal position in the current fiscal year (so far in the current fiscal, 28 states and two UTs have cumulatively raised a total of Rs 4.27 lakh crore via market borrowings, 50% more than the borrowings in the corresponding period of 2019-20).

The Centre is relying on a likely jump in excise collections, thanks to the steep hike in the tax rates for auto fuels, and a likely pick-up in direct taxes and GST receipts in the second half, to rein in its deficits.