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Friday, February 26, 2021

100 days and GDP shrink: Government works on a fresh stimulus

In mid-May, Sitharaman had announced five tranches of the AtmaNirbhar package, adding up to an economic package of Rs 20 lakh crore.

Written by Aanchal Magazine , P Vaidyanathan Iyer | New Delhi |
Updated: September 7, 2020 10:53:21 am
While April-June GDP was expected to shrink, there are clear signals the second quarter, too, will contract, with July and August not showing any promise of big recovery. (File)

AFTER MORE THAN 100 days since Finance Minister Nirmala Sitharaman announced an economic package, six weeks after a series of meetings at the highest level underlined the need for a stimulus and official estimates indicating the worst-ever first quarter GDP contraction of 23.9 per cent, the government has finally identified the “non-salaried middle class and small businesses” as the target audience for a second round of stimulus.

In mid-May, Sitharaman had announced five tranches of the AtmaNirbhar package, adding up to an economic package of Rs 20 lakh crore. Much of it was liquidity support, with extra fiscal outgo by the Central government just a little over 1 per cent of GDP. While April-June GDP was expected to shrink, there are clear signals the second quarter, too, will contract, with July and August not showing any promise of big recovery.

With a more clearer picture now available, the government seems to have zeroed in on who needs financial support the most but is still debating its timing and mode of delivery. “This round of fiscal stimulus will be more for the group which is not completely poor and not rich. This in-between, the non-salaried middle class, it is the most affected. The timing of the rollout is crucial in getting the maximum benefit,” a senior government official told The Indian Express.

In the meantime, even as several inter-ministerial discussions were being held, Prime Minister Narendra Modi presided over presentations by members of his Economic Advisory Council, NITI Aayog, Chief Economic Advisor’s office, the Ministry of Finance and the Ministry of Commerce. One consistent message in the presentation by EAC, NITI and CEA was the need for a fiscal stimulus and support for the financial system, said more than one of the 50-odd participants in the four presentations made over 10 days end of June and beginning of July.

With almost a dozen Union Cabinet ministers attending these meetings, the participants stepped out with a sense of optimism because they saw it as a signal that the Prime Minister was building consensus within the government for a bigger stimulus.

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IN ELABORATE presentations to the PM six weeks ago, NITI Aayog, the PM’s Economic Advisory Council and the Chief Economic Advisor’s office in the Ministry of Finance, made two important points: one, the economy needs a fiscal boost, and two, the financial system needs support. The government has zeroed in on the target audience but is still working out the timing and the quantum.

Those present in the meetings included Sitharaman, Rajnath Singh, Amit Shah, Nitin Gadkari, Piyush Goyal and Gajendra Singh Shekhawat.

But the government has hardly made any announcements over the last six weeks based on these discussions. “We got the impression that the government will press the accelerator… but doesn’t seem like that,” said an official.

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The government, an official said, believes it has provided substantially for the poor in terms of making available food grain, cooking gas, and income from MGNREGA work. “The non-salaried urban and rural people, who are not abject poor, and do not have an assured income, are the ones who have been left out in the previous packages. These are the small businessmen and shop owners, such as an air conditioning repair shop or similar ones,” the official said.

“There is a general consensus that more demand is required. But funds are limited, and there is a binding factor on the quantum. It is not clear what can be done that will make it directly effective. There are different opinions, we still need to work out the details,” the official said.

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Further, there are expectations that the services sector, especially the non-financial services sector, might continue to drag for a while. Several discussions are learnt to have been held about whether a tax break could be given for a limited time period to restaurants in the service sector, but the decision did not materialise as it was thought it may not yield an immediate boost to consumption demand, another official said.

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