India’s relief package won’t affect its budget math much
PremiumA prepayment of liabilities in 2020-21 has created space to absorb the modest cash outlays involved
The quarter gone by has turned out to be fairly tumultuous, with April-May 2021 afflicted by a second covid wave, followed by some relief in June as India’s unlock and vaccination drive gathered pace, even as the emergence of the Delta variant has created fresh anxiety.
In this backdrop, the finance minister unveiled an economic relief package on 28 June with a substantial total value of ₹6.3 trillion, or 2.8% of India’s estimated nominal gross domestic product (GDP) for 2021-22. This package includes a set of schemes focused on relief for pandemic-affected sectors such as tourism and health, as also measures to enhance social security and provide an impetus for growth and employment.
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Overall, the announcements can be bucketed into four categories. The first is credit guarantee-linked schemes. This includes a loan guarantee for covid-affected sectors with a cost of ₹1.1 trillion, of which ₹50,000 crore is for health, an enhancement of the Emergency Credit Line Guarantee Scheme (ECLGS) by ₹1.5 trillion and a new credit guarantee scheme for micro-finance institutions, with a modest cost of ₹7,500 crore.
The loan guarantee scheme for covid-affected sectors includes financial support to travel and tourism stakeholders who have been severely hurt by the pandemic. In aggregate, ECLGS-1.0, 2.0 and 3.0 have resulted in credit disbursal of ₹2.69 trillion, following which the government has enhanced its admissible guarantee cap to ₹4.5 trillion from ₹3 trillion.
Such guarantee-linked schemes are welcome, as they will help ensure that the credit needs of the pandemic-hit sectors are met at a reasonable cost. Needless to say, the schemes may not be successful in alleviating all the woes of the affected sectors, for instance in terms of reversing or preventing layoffs, especially for workers earning more than ₹15,000 per month.
The next lot is of new schemes, including free tourist visas to 500,000 tourists to attract visits to India once travel restrictions are eased, additional funds for exports, public health and Bharat Net, and extensions of earlier schemes such as the Atmanirbhar Bharat Rozgar Yojana and the tenure of the performance-linked incentive (PLI) scheme for large-scale electronics manufacturing.
Lastly, there was a reiteration of recent decisions such as the extension of free foodgrain up to November 2021 ( ₹93,869 crore) and enhancement in fertilizer subsidy ( ₹14,775 crore) announced after the Union Budget for 2021-22, as well as announcements made in that budget. The latter include a reform-based, result-linked power distribution scheme, with a central outlay of ₹1 trillion spread over five years.
In particular, the continuation of free foodgrain up to November this year will help bolster demand at the bottom of the pyramid, and also aid in ensuring labour stays in urban areas instead of migrating back to the hinterland. This will both reduce pressure on the Mahatma Gandhi National Rural Employment Guarantee scheme to provide income support in rural areas and help avoid disruptions on account of labour shortages when various sectors of the economy start to gather speed.
Overall, the economic relief package is dominated by the extension of guarantees of around ₹2.6 trillion, which will have a limited fiscal cost upfront. The announcements of spending ₹1.1 trillion towards free food and an enhanced fertilizer subsidy, while welcome, had already been made earlier this year. Moreover, schemes worth ₹2.4 trillion are spread over a duration of two to five years. We have estimated the fresh fiscal outlay of the new announcements included in this package at ₹50,000-70,000 crore for 2021-22, or 0.2-0.3% of the country’s estimated nominal GDP.
Coming to the implications on the 2021-22 fiscal deficit. So far, we have provisional data on the Union government’s finances only for April 2021, the first month of the current fiscal year. This revealed a shrinkage in the deficit to ₹78,699 crore from ₹2.8 trillion during April 2020 amid a national lockdown. Fiscal data for May 2021 was to be released on Tuesday, and will provide cues on the pace with which central government expenditure progressed as state-level restrictions widened.
Given the moderate growth of 9.5% embedded in the 2021-22 budget estimates for gross tax revenues (from the provisional actual for 2020-21), relative to our expectation of a nominal GDP expansion of 15-16% in the current fiscal year, we do not foresee a material undershooting of the targeted tax collections, even with some eventual reduction in excise duty on fuels.
Moreover, the higher-than-budgeted transfer of surplus by the Reserve Bank of India in 2021-22 and prepayment of the Food Corporation of India’s liabilities of around ₹1 trillion in 2020-21 provide a cushion of around ₹1.5-1.6 trillion. This should be adequate to cover the costs related to the free foodgrain and enhanced fertilizer subsidy of ₹1.1 trillion, and the fresh outlay of ₹50,000-70,000 crore for 2021-22 as part of the economic relief package.
Therefore, the magnitude by which the fiscal deficit in 2021-22 will overshoot the budget estimate of ₹15.1 trillion will depend on how much of the disinvestment target of ₹1.75 trillion remains unachieved at the end of this year. Another factor is the extent by which the outlay of ₹35,000 crore for vaccine procurement is exceeded, which may be necessary for the country to make vaccine imports available at the earliest.
Aditi Nayar is chief economist, ICRA
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