Stimulus 3.0: Reforms hold the key

By Pranjul Bhandari & Aayushi Chaudhary
The centre announced an additional fiscal support package, calling it the Atmanirbhar Bharat Package 3.0. The package, comprising 12 schemes, had a multi-sector focus—across the labour market, stressed sectors, social welfare, manufacturing, housing, infrastructure, exports and agriculture. Some of the schemes are time-bound, while others have a medium-term focus. Some stood out in particular, for instance, the extension of the 100% credit guarantee to 26 stressed sectors with credit outstanding in the Rs 0.5-5 bn range. Additional credit to these firms can be up to 20% of outstanding credit, payable over five years. The extension of the PLI scheme to 10 new sectors is also likely to boost manufacturing over the medium term.

Stringent qualifying conditions could blunt the uptake and economic impact. For instance, the job subsidy scheme is only focused on formal sector employees earning less than Rs 15,000 per month. The income tax relief for home buyers is only limited to purchases of houses costing less than Rs 20 mn. Much of the real estate sector stress is in houses over this threshold. The overall price tag of today’s schemes is Rs 2.7 tn (1.4% of GDP).

But, the incremental cash outgo in FY21 is likely to be much smaller, given (1) some schemes have a multi-year focus (eg, PLI scheme), (2) some may face implementation delays (eg, additional capex outlays), (3) some may see a spill-over of expenditure into the next year (fertiliser subsidy), and (4) some may be funded by repurposing of expenditure. Recall that in the first half of the year, fiscal expenditure is contracting 1% y-o-y, vs a 13.2% expansion budgeted.

The fiscal support so far has had a cash outgo of 1.7% of GDP. With the latest announcement, it is likely to reach ~2% of GDP. We forecast the Centre’s deficit to widen to 8.2% of GDP in FY21 vs 3.5% budgeted, led more by a shortfall in tax revenues than a rise in expenditure. The risk to our forecast is that the deficit comes in a shade narrower, given weak expenditure trends (-1% y-o-y y-t-d).

While the fiscal stimulus has been small, monetary policy has been extremely accommodative. There has been a meaningful pick-up in activity over the last few weeks. Some of this could be reflective of festival-led and pent-up demand. Urgent reforms are needed for this uptick to sustain. The focus should extend from announcement to effective implementation.

Edited excerpts from HSBC Global Research’s India: More fiscal support announced (dated November 12)

Bhandari is chief India economist and Chaudhary is economist, HSBC Global Research. Views are personal