On Wednesday, Prime Minister Narendra Modi said the country should view the Covid-19 crisis as an opportunity to achieve economic self-reliance. In his address to the nation, he stressed on the importance of promoting “local” products. He called it Atmanirbhar Bharat Abhiyan (or Self-reliant India Mission) and said that in the days to come, his government will be unveiling the details of an economic package towards this aim, which, after including the earlier reliefs announced by Finance Minister Nirmala Sitharaman and the RBI, would be worth Rs 20 lakh crore — or 10 per cent of GDP in FY20.
Is this a new package?
Not entirely. While the PM did not give the details, he did specify that this calculation of Rs 20 lakh crore includes what the government has already announced and the steps taken by the Reserve Bank of India (RBI). This means the total amount of additional money — that is over and above what the government would have spent even in the absence of a Covid crisis — will not be Rs 20 lakh crore. It would be substantially less.
That’s because the PM has included the actions of RBI, India’s central bank, as part of the government’s “fiscal” package, even though only the government controls the fiscal policy and not the RBI (which controls the ‘monetary’ policy). Government expenditure and RBI’s actions are neither the same nor can they be added in this manner. Nowhere in the world is this done, clarifies Prof NR Bhanumurthy of NIPFP.
For instance, when the US is said to have announced a relief package of $3 trillion (Rs 225 lakh crore), it only refers to the money that will be spent by the government — and it has nothing to do with what the Federal Reserve (US central bank) might have done.
So will the actual amount spent by the government be less than Rs 20 lakh crore? If so, by how much?
A rough estimate suggests that the RBI’s decisions have provided additional liquidity of Rs 5-6 lakh crore since the start of the Covid-19 crisis. Add this to the Rs 1.7 lakh crore of the first fiscal relief package announced by the Centre on March 26. Together, the two already account for 40 per cent of the Rs 20-lakh crore package. That leaves an effective amount of Rs 12 lakh crore.
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However, if the government is including RBI’s liquidity decisions in the calculation, then the actual fresh spending by the government could be considerably lower than Rs 12 lakh crore.
That’s because RBI has been coming out with long term bond buying operations (long term repo operation or LTRO, to infuse liquidity into the banking system) worth Rs 1 lakh crore at a time.
If, for argument’s sake, RBI comes out with another LTRO of Rs 1 lakh crore, then the overall fiscal help falls by the same amount.
Why shouldn’t RBI’s package be included in the overall package?
That’s because direct expenditure by a government — either by way of wage subsidy or direct benefit transfer or payment of salaries or payment for construction of a new hospital etc — immediately and necessarily stimulates the economy. In other words, that money necessarily reaches the people — either as someone’s salary or someone’s purchase.
But credit easing by the RBI — that is, making more money available to the banks so that they can lend to the broader economy — is not like government expenditure. That’s because, especially in times of crisis, banks may take that money from RBI and elsewhere and, instead of lending it, park it back with the RBI.
This is exactly what is happening right now. At the last count, Indian banks had parked Rs 8.5 lakh crore with the central bank. So in terms of calculations, RBI has given a stimulus of Rs 6 lakh crore. But the reality is that it has received an even bigger amount back from the banks.
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