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Stimulus package unravelled

Everyone was glued to the seats as the PM of India announced Rs 20L Crore as part of India's response to the problems caused by Covid-19. We have been waiting for quite some time and what was supposedly 10% of GDP was welcomed by everyone.

But as usual, the devil is always in the details. Over the last 5 days, the Finance Minister of India has been slowly releasing an episode a day. Why then are the stock markets down 3% today, if the govt has actually thrown such large sums at the problem?

Let's first unravel each day:

Day 1: The government came up with programs worth Rs 5.95L Crore including a Rs 3-lakh-crore credit lifeline to small and medium business units among other steps. While the measure in itself was welcome as it took care of cash flow needs and liquidity of small businesses, experts and ordinary men were actually looking for steps that would boost demand.

Day 2 turned out to be a dampener even though Rs 3.1L crore was released. Nomura said the fiscal package announced in this episode was, hold your breath, 0.08% of GDP. There was surely a long list of measures that included focus was on migrant workers and street vendors but fiscal measures were amiss.

Day 3 was about Agriculture were much needed administrative and legal reforms for the farm sector totalling Rs 1.5L Crore was promised. Certain news media, however, pointed out that only 23% or Rs 35K crore will come out of the Centre's budget and that too over the next 2-3 years.

Day 4: Everyone was eagerly awaiting the climax - a stimulus to cure the economy but with a minuscule Rs 8.1K Crore relating to social infrastructure, surely hope was running out.

Day 5: The FM started the last day with a Rs 40K crore allocation increase to MNREGA. Phew, just as we were giving up hope, the FM comes with a demand booster targeted at the lowest economic strata.

Most economists state that the fiscal cost of the entire package, including prior announcements made by the government, will be roughly Rs 2-2.7L Crore, which translates to 1-1.2% of GDP.

All the other measures are about shifting from entitlements to empowerment. There is not much free money and the only free item was foodgrains and even this has a sunset clause. The govt surely believes that with selective hand-holding, improved liquidity conditions and a slow and monitored winding down of the lockdown, the Indian economy can revive. We are also nowhere at the end of the crisis and the govt perhaps wants to hold back some firepower.

No one can quarrel with the reform agenda—most of which has been proposed by several governments in the past. But there are many who legitimately question the government’s assumption on what it takes to kickstart an economy which has been in shutdown mode for two months.

Nurturing a credit culture makes sense if there is a healthy demand in the economy. The vision of Aatmanirbhar Bharat will succeed only if we bring the country out of the COVID crisis with minimum damage. For now, the Markets are clearly showing their unhappiness.

Source: Moneycontrol, Mint & Quint

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