Announces 20Lakh Crore Economic Package; To stress on Land, Labour, Liquidity, Loss
Information on Lockdown 4.0 will be rolled out by different State Chief Minister before May 18
Praveen K Singh
New Delhi: Prime Minister Narendra Modi in his address to the nation has announced a package of Rs 20Lakh Crore Economic Package.
“Production and manufacturing in India will add to its economy and we are determined towards it,” he said. “At a time when Corona started, India was not even having PPE kit and N-95 mask manufactured in the country and now we are producing over 2 lakh units in a day,” PM Modi said.
The recent decisions by the government, the decisions by the RBI combined with the May 12 financial package announcement come to about Rs 20-lakh-crore — nearly 10% of India’s GDP.
There is unprecedented crisis but India will neither get tired nor give up the fight against coronavirus, and asserted that “we have to protect ourselves and move ahead as well.
Special economic package is for our labourers, farmers, honest tax payers, MSMEs and cottage industry, the Prime Minister said in a televised address to the nation. India is standing on five pillars — economy, infrastructure, governing systems, vibrant democracy and supply chain, he said.
He said that the Finance Minister will be elaborating on all measures in this economic package.
This comprehensive package of policy reforms, financial incentives and monetary measures is aimed to re-energise the economy by giving more fiscal space to the states, accelerating public works, easing the availability of credit and putting more cash in the hands of the people to generate demand, the PM said.
The PM said that the package would reenergise the nation and the sectors will be benefitted out of this – medium, small and all enterprises towards restarting the economy. Buffeted by the coronavirus crisis and the consequent lockdown, it will require special efforts by all stakeholders, including the government and industry.
The PM announced the package based on feedbacks from states and key ministers and top bureaucrats. A meeting in this was conducted April 11, 2020, the conference with the Chief Ministers of all state governments.
This economic package has been in the work since late March. The expectation was that the government would announce it in early April. The third phase of the lockdown, enforced on March 25, expires on May 17, it is expected to give greater freedom to economic and business activity, with some restrictions remaining in place to check the spread of Covid-19.
The Prime Minister also announced that the Lockdown 4.0 will be announced by the state chief ministers respectively with the focus on their local needs.
The pandemic spread to the Indian economy at a time when it was already vulnerable, having been hit by the double whammy of a downturn in household spending and private investment plus a credit crunch. The International Monetary Fund (IMF) has predicted that growth in Asia’s third largest economy would slow to 1.9 percent in fiscal 2020-21, the slowest pace in three decades. This month, credit assessor Moody’s Investors Service forecast zero growth for India in the year, down from an estimated 4.8 percent in 2019-20. Those numbers look optimistic when compared to securities firm Nomura’s estimate of a contraction of 5.2 percent in GDP in 2020-21. The firm had previously estimated a contraction of 0.4 percent.
The people cited above outlined the broad contours of the draft stimulus package. For one thing, the Centre is in talks with state government to relax provisions of the Fiscal Responsibility and Budget Management (FRBM) Act so that the latter can borrow money to finance the fight against Covid-19. The FRBM Act mandates states to keep their fiscal deficit at 3 percent of state gross domestic product (SGDP); states want greater leeway to borrow because they are strapped for funds — they have suffered a revenue loss from dwindling tax collections because of the lockdown.
To be sure, the exemption from the FRBM Act may not be unconditional. States will also have to commit to wide-ranging reforms in areas such as labour regulations, agricultural marketing, urban development and power distribution, a second person said.
Earlier, the Centre on Friday raised its own market borrowing estimate for 2020-21 to Rs 12 lakh crore from Rs 7.80 lakh crore estimated earlier to make up for an expected shortfall in revenues.
According to an economic analysis, it suggests a FY21 fiscal deficit of over 5.5-6.0 percent of GDP. Nomura expects the central government’s fiscal deficit to expand to 7 percent of GDP in FY21, double its original target.
The Centre may again raise its borrowing limit to fund a series of welfare schemes and stimulus packages, the second person said. The analysis also says that the extra borrowing announced by the Centre earlier could be enough to take care of the fiscal slippage because of economic underperformance, but not sufficient to cover the extra Covid-19 fiscal support. “Thus, we see a risk of more extra-borrowing announcements in H2 FY21, as the full extent of the fiscal slip becomes evident,” it said.
The proposed stimulus package will also have a component to boost demand that would include direct cash transfers to the underprivileged sections. The Centre will also prod public sector banks to transmit the benefits of policy rate cuts announced by the Reserve Bank of India (RBI). “The RBI could consider the option of quantitative easing as a mechanism to reduce cost of borrowing,” the Prime Minister said.
Quantitative easing is undertaken by a central bank to increase money supply in the economy prompting commercial banks to lend aggressively and thereby raising consumer spending. It involves the central bank buying government assets, particularly government bonds with the money it creates. According to the people, the central bank could consider reducing policy rates further to make personal and corporate loans cheaper to boost consumption and investment. On March 27, RBI slashed the policy rate by 75 basis points to 4.4 percent and also infused Rs 3.74 lakh crore of liquidity into the banking system. One basis point is one-hundredth of a percentage point.
The package will have specific schemes to support micro, small and medium enterprises (MSMEs), but many policymakers believe the incentives should be routed through agencies such as banks, non-banking finance companies (NBFCs) and the Small Industries Development Bank of India (Sidbi), the people said. The government is also considering giving sector-specific fiscal and policy support to large industries such as airlines, hospitality and tourism that have been the worst-hit by the pandemic.
The proposed package focuses on various aspects of the economy. According to an official in the Finance Ministry, a Rs 111 lakh crore National Infrastructure Pipeline (NIP) is also aimed to accelerate growth and create employment in both urban and rural areas. The NIP is already under execution as 40 percent of the projects worth Rs 44 lakh crore are at various stages of implementation. To encourage industry to boost output, the government is planning production-linked incentives on the lines of those offered to large-scale electronics manufacturing, the people said. The government on April 1 notified a Rs. 40,995 Crore incentive package for electronics manufacturing that would provide direct employment to over 200,000 people in five years.
Battered by the prolonged Covid-19 crisis and lockdown, industry has been awaiting a significant stimulus of about Rs 10-16 lakh crore that would create demand, infuse liquidity and support production.
The nation looks ahead to this new boost with bold reforms announced by the Prime Minister and look forward to a constructive change towards it fight against Covid 19, the global pandemic.