Nirmala Sitharaman recently unveiled another booster dose to put the Indian economy back on track. It will help generate jobs and facilitate the revival of several moribund sectors.
Some measures will make an immediate impact, some others that will become evident only over the medium term.
The third tranche of the stimulus package announced by Indian Finance Minister last week was criticised by a few in India but it has found ringing endorsement from global ratings agency Fitch Solutions.
A detailed analysis of the Stimulus 3.0 package reveals a mixed bag, with some measures that will make an immediate impact, some others that will become evident only over the medium term and yet others whose outcomes and impacts are difficult to assess at this point in time.
Fitch Solutions recently said the package will generate employment and credit and help the manufacturing sector get back on track. And though it will support an economic recovery, it is not possible at this moment to gauge the exact impact it will have on the state of public finances in India. "While many of these schemes should be supportive to India′s economic rebound over the coming quarters, the actual impact on public finances is difficult to ascertain. For example, the PLIs will span across a five-year period and their fiscal impact will likely only be seen from 2021-22 onward," a Fitch Solutions statement said, adding: "We maintain our forecast for a central fiscal deficit of 7.8 per cent of GDP in 2020-21, which already accounts for more central government borrowing than is currently been targeted...”
Poring over the fine print of the package, one finds a multi-sector focus and a variety of time-bound and medium-term schemes for the labour market, stressed sectors, social welfare, manufacturing, housing, infrastructure, exports and agriculture.
For example, widening the scope of the PLI scheme, which has proved successful in drawing investments from China in the smartphones sector, to 10 other sectors will be a huge positive for employment and will almost certainly have a multiplier effect on growth. But its impact will be felt only over the medium term. Some of the more optimistic analysts are saying it will spur growth from next year itself. IGB, however, estimates that its impact will become evident only after 18-24 months.
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The stimulus package mandates stringent conditions to qualify for benefits under it. This, and implementation challenges could blunt its impact on the economy. For instance, the multi-year schemes will obviously unfold slowly over many years, limiting their immediate impact. Then, schemes that envisage additional capital expenditure could face delays because of the government's precarious financial position and the reluctance of the Modi administration and the Reserve Bank of India (RBI), India's central bank, to monetise the fiscal deficit. It should be borne in mind that government expenditure is believed to have contracted 1 per cent against the projected expansion of 13.2 per cent as provided for in the Budget.
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Given all these caveats, the cash outgo for the exchequer under Stimulus 3.0 is likely to be about 0.3 per cent of GDP. If one adds the cash outgo of 1.7 per cent of GDP in the previous tranches, the total fiscal hit from the government's three stimulus announcements comes to about 2 per cent of GDP, which many feel is much too small for an economy the size of India.
Writing in The Economic Times, Sudhakar Shanbhag, Chief Investment Officer, Kotak Mahindra Life Insurance Company, said: “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. Reforms are needed for this uptick to sustain. The focus should extend from announcement of reforms to their effective implementation. Also, nurturing an environment of policy certainty with regard to taxes, foreign direct investment rules and payment of dues to small businesses can have a meaningful impact on kick starting the private capital spending cycle.”
In sum, it will be fair to say that all measures are much needed to put the economy back on track. Experts are almost unanimous that the measures taken so far are helping the economy sprout green shoots that now need to be nurtured to get back to a full-blown recovery. In conclusion, however, the package could have been more ambitious and bold by putting money into the hands of more people.