What do you mean by an Economic Stimulus? Well to simplify, an Economic Stimulus is one whereby the use of both Monetary and Fiscal policy an economy is balanced and economic activities rise. The Economic Stimulus is used during recession or depression when unemployment is higher than usual and the country faces a slowdown in economic activities.
Recently the Government of India announced a whopping 20 lakh crore Fiscal Stimulus and made headlines all around the globe. In this article, I would be giving a reality check on the mentioned stimulus and unveil the truth.
Before we do that, we have to understand the two major components of an Economic Stimulus:
i. The Fiscal Stimulus: This is the stimulus provided by the Government. This includes cutting tax rates, increased Government spending (not spending by the RBI), increased borrowings of the Government, etc.
ii. The Monetary Stimulus: This is the stimulus provided by the Central Bank (in our case, the RBI). This includes cutting interest rates, using quantitative ease to push liquidity, etc.
So you see, the stimulus is divided into two parts- one given out by the elected Government and one by the Reserve Bank of India. Mixing both of them might provide a hazy picture. In a recent research paper on the Impact of Covid-19 on the Indian Economy which was written by me, I mentioned that apart from the RBI providing liquidity, some major and bold fiscal stimulus would be required to uplift the economy from the downward spiral it has been speeding up too. I guess the Government realized this and announced a 20 lakh crore stimulus but is it 20 lakh crore? Let’s find out.
‘Atma Nirbhar Bharat Abhiyan’ the word trending on social media has manifold meanings. First, let me bust the bubble for you and let you know the truth. Out of the 20 lakh crore the Government announced as Stimulus, approximately only 10.7 lakh crore is at the disposal. Almost 50% of the stimulus has already been used. Shocking? Well, that’s not it. The RBI has provided a stimulus of 7.5 lakh crore (Monetary Policy) to boost liquidity in the market (Liquidity means to provide cash relief to the businesses and the economy). The Government mixed up the Monetary policy along with its Fiscal policy and provided a combined bundle of 20 lakh crore and all the citizens all around the world cheered for it. The facade is less painful than reality.
Since almost 9.3 lakh crore is already used out of which approximately 7.5 lakh crore is provided by RBI, this leaves the Government with 10.7 lakh crore to spend. This wasn’t made clear while the delivery of 20 lakh crore stimulus. Upon analysis, the curtains dropped. I am not criticizing the Government here but providing the reality check to the people, No doubt this package would be extremely beneficial for the people. The Debt-to-GDP ratio has now been pegged to 77% but the Government is trying its best to boost the economy but I would like it to be presented in a real way and not in a sugarcoated way.
Anyway, the actual stimulus is 10.7 lakh crore and the Finance Minister Smt. Nirmala Sitharaman had delivered five tranches on how the remaining funds would be allocated. Let us summarize the important decisions taken in the five tranches.
In the First Tranhce, the Government took some major decisions regarding MSMEs (Micro Small and Medium enterprises) and providing them the support for growth. A reduction of 25% on TDS and TCS (Tax Deducted at Source & Tax Collected at Source) will release 50,000 crores of funds. 2500 crore liquidity has been pushed to EPF (Employers Provident Fund) benefiting 72 lakh people. The NBFC (Non-Banking Financial Companies) were also relieved when the Government announced a 45,000 crore partial credit guarantee and 90,000 crore emergency liquid injection against all receivables, the state would guarantee it.
Free food would be provided to migrants and a new and interesting move of One Nation One Ration card. 83% of all PDS (Public Distribution System) will be covered by Aug 2020 and 100% by March 2021. There have been many policies for the tribals, street vendors, the poor, and migrant workers in the Second Tranche.
The Third Tranche focused on farmers and the agriculture and allied sector. 1 lakh crore has been allocated for the development of infrastructure like cold chains, storage facilities, etc. 10,000 crores has been allotted to Micro Food Schemes benefiting 2 lakh Micro Food Enterprise. The Pradhan Mantri Matsya Sampada Yojana aimed at developing the marine and inland fisheries will spend 20,000 crores for the same. 15,000 crore would be spent on dairy infrastructure. 13,343 crore would be spent for vaccination of livestock. This tranche focused on the backbone of the Indian Economy.
In the Fourth Tranche 8 key sectors were aimed at namely, Coal, Minerals Defence Production, Airspace Management, Social Infrastructure Projects, Power Distribution Companies, Space and Atomic Energy. The government has introduced Commercial mining of Coal to become self-reliance in coal production. Private investment in the minerals sector is encouraged. There would be ease in restrictions of the utilization of Indian Air Space for encouraging efficient flights. Power Distribution Companies in Union Territories would be privatized. There would be private participation in the Space sector of the country, which comes as a bold and interesting move by the Government. The Government aims at linking the start-up system with the nuclear sector for efficient management.
In the final Fifth Tranche, the Government aimed at providing ease of business doing and also improving the ranking of India in starting a business. Except for the strategic sector, all the PSEs would welcome private investments. Some norms of insolvency have been eased too.
In my opinion, it was a much needed relief for the economy as unemployment levels have been staggering high from 8.74% in March to 23.52% in April according to the CMIE estimated. As such, this stimulus (both fiscal and monetary) would prove to be beneficial for the economy as a whole and at such times of uncertainty, might provide some relief. The statements in this article is not contradictory but rather an opinion that the Government should provide a clarity of thoughts and speech and not confuse the general public.
As the great Economist, whose multiplier effect idea is still used in policy formulation, Mr. John Maynard Keynes said, “In the long run, we are all dead.” Thus, time would tell us how well the policies would fare in the future.