So far, India has experienced the toughest lockdown in the world, accompanied by the meagerest fiscal support to vulnerable sectors of the economy. In fact, the story told by the Department of Finance over the past 45 days was that India did not have the resources for a big bang tax package similar to those offered by many developed countries.
Nonetheless, Prime Minister Narendra Modi chose on Tuesday to unveil a mega fiscal package of Rs. 20 lakh crore – equivalent to 10% of India’s GDP – even as a more calibrated “Lockdown 4.0” is set for a number yet undefined weeks from May 17.
On the face of it, the magnitude of the package appears to reflect a desire to make up for things that have gone horribly wrong in recent weeks – particularly the terrible plight of migrant workers and their families, who have been virtually abandoned by the Indian state. Details of the package will show how much was actually provided to the impoverished and unorganized working class.
The political focus of the package clearly suggests that Modi wants to be considered as generous in spending as other major countries. This includes the United States, which has implemented a bailout of around 13% of GDP.
However, it will be necessary to wait for the package to be unveiled by the Ministry of Finance because the devil is often in the details.
The key element to monitor is the amount of money that will be distributed immediately to the most needy sections of society. In an unprecedented economic crisis like this, with nearly 25% of the total workforce unemployed and perhaps another 25% uncertain of getting their jobs back, the government must focus solely on how 50 % of India’s workforce will be working their households over the next year as the economy struggles to return to normal.
India’s total workforce is 500 million and Modi’s package should be judged first and foremost by how it will support half of India’s workforce (i.e. 250 million) who are either unemployed or waiting to return to work, after normalization.
The most important element of the package is therefore the immediate financial support for this lot. The support can be either a direct cash transfer to the very poor among the unemployed, or in the form of incentives for small and micro-enterprises to bring many more back to work. This will be essential to generate short-term demand in the economy, which will help increase supply – is down more than 70% in all sectors except health.
The Prime Minister said that the Rs 20 lakh crore package includes all the liquidity enhancement measures already announced recently by the RBI. Depending on how you calculate, the central bank effort amounts to around Rs 5 lakh crore. It will also include the first relief package for India’s poorest, which was worth Rs 1.7 lakh crore. So what the Center has left to deliver is just over Rs 13 lakh crore. Of this amount, Minister for MSMEs, Nitin Gadkari, said much was already owed by the government – both central and state – to small businesses in India. Gadkari told CNBC last week that there was such a large amount of unpaid government dues to the MSME sector that he would not even want to reveal the figure. It is suspected to be up against a few lakh crores, including GST refunds owed to exporters. Gadkari said MSMEs could obtain bank loans secured against these outstanding amounts. It would be unfair for the government to add this to its aid package because it is money already owed to small businesses.
The package can also tap into resources under state control, as it did in the first round of 0.8% of GDP budget support. Tax holidays for new investments are added to the tax package, but they do not constitute new cash payments immediately, as investments take time to bear fruit.
All these elements will have to be deducted to determine the real extent of the fresh funds provided by the Economic Recovery Center.
I will be surprised if the new injection of cash via new borrowing by the government will exceed 3% to 4% of GDP, which is equivalent to Rs 6 Rs 8 lakh crore. So, the Rs 20 lakh crore tax package may seem huge, but in terms of actual additional cash flow, the package may turn out to be more modest.