The third package confirms some patterns in the Central government’s fiscal response to the pandemic. First, the spending is calibrated, as seen in the continued expansion of the MGNREGA budget, which received its second extension, given that three-fourths of the earlier expanded budget had been used up by October, and supply was falling short of the still-strong demand for jobs. On the other hand, the free grains programme was not extended beyond November, as the economy is now more or less fully open, and the risk of abject hunger is lower.
Second, the measures are designed to maximise the economic impact of fiscal spending, like the various credit guarantee programmes, where the flows triggered by the guarantee are several times the potential fiscal cost. The enhancement of the loan threshold of the emergency credit line guarantee scheme for stressed sectors like tourism in this package should help, even if such a move earlier in the year may have had a bigger impact.
Third, the selection of some schemes and rejection of others hint at leakage deterrence being important for the government. Take the problem of urban poverty and joblessness. The still-elevated demand for MGNREGA work is a sign of distress in rural areas, and it is not hard to imagine that similar if not more severe pain would exist in urban areas. After all, cities saw harsher lockdowns, more infections and deaths and more activities that got restricted; in rural areas, other than education, there was little else that needed to be or could be stopped. Not everyone had the option to or went back to their villages.
It is not that the government is not aware of this problem. However, there are no schemes that can target the urban jobless and poor without significant leakage or selection errors. Paycheque protection programmes in the developed world faced similar challenges, and emerging evidence of fraud in these schemes is not a surprise; that those governments still went ahead with them was perhaps to minimise the overall macroeconomic pain even if some of the money was misdirected or stolen. Unsure of whether an urban MGNREGA could be implemented cleanly, and even if so, what its impact would be on rural-urban migration, the Indian government has chosen to target this problem indirectly, through a sharp increase in the budget for urban affordable housing.
The expansion of the Production-Linked Incentives (PLI) scheme to 10 new sectors is a result of the success thus far of the PLI scheme for handsets. Even as one awaits the details of schemes for the new sectors — to see how the incentives to firms are balanced with longer-term benefits to the economy and how policy steers clear of lobbyists while at the same time working alongside the industry — the choice of sectors and the timing of the move are encouraging. Fiscal spending on this would only start next year, in our view.
That leaves us with around Rs 1 lakh 20 thousand crore (or about 0.6 per cent of GDP) of stimulus in the third package, of which 40 per cent is to clear the long-standing arrears of fertiliser companies. The cumulative fiscal intervention is now 2.2 per cent of GDP, close to the 3 per cent of GDP of stimulus that was considered necessary earlier in the year.
Is it sufficient? Forecasts for economic growth this year are now being revised up, though full-year GDP may still fall 7 per cent in real terms. Quite a bit of the GDP loss in our view is “water under the bridge”, like the rise in the government deficit, and the “did not earn, but also did not spend” impact on wage earners during lockdowns. Once adjusted for that, the fiscal intervention appears to be in the right ballpark, but in reality may still be falling short, particularly as the fiscal measures include repurposing of expenditure, meaning that the state and central governments have also cut spending elsewhere.
One must also note that the strong revival in economic activity is also improving the fiscal condition of the Central as well as state governments. Even on somewhat conservative assumptions, the Centre’s gross tax receipts could grow 19 per cent year-on-year in the second half of the financial year (October to March), as against a 22 per cent decline in the first half. A large part of this growth is driven by fuel taxes, which could increase more than 60 per cent in the second half: Growth in taxes excluding that may be about 12 per cent.
This does not imply or need nominal GDP growth to jump sharply, though even that may be possible given the low base last year. Income taxes, both personal and corporate, should be more back-ended this year than normal. When people/firms paid their advanced taxes in June and September, their assessment of full-year income would have been far lower than it is now. In fact, profits for companies in the BSE500, which account for a third of corporate tax collections, are up strongly in the September quarter itself.
Fiscal stress should ease for the states too, as central transfers account for more than half of states’ revenue receipts. Growth in states’ own taxes is likely improving too, like from alcohol, fuels and real estate, which are all seeing a recovery in volumes.
Even if one assumes a significant shortfall in disinvestment proceeds and non-tax revenues, the Central government should be able to grow spending by 7 per cent this year, implying an acceleration from the 1 per cent decline in expenditure in the first half. However, like most large organisations, state and central governments are unlikely to be able to devise new schemes to spend this money with just four months to go. We believe three responses would be desirable once bureaucrats are convinced that the growth in tax receipts is not temporary.
First, a recalibration of borrowing needs this year, which could provide some relief to the bond markets. Second, clearing overdue payments, particularly by state governments — the Centre’s decision to clear fertiliser arrears is a step in this direction. This by itself could provide a stimulus to the economy. Third, and most important, would be for state and central governments to build in a stimulus in next year’s budget.
One must appreciate the restraint in “spending other people’s money”, a tendency most regimes find hard to resist. But it is equally important that nominal GDP growth picks up strongly to keep government debt sustainable, create space for government spending on defence, education and health, and perhaps as importantly, to absorb the large balance-of-payments surplus that can only be brought down with stronger domestic demand.
This article first appeared in the print edition on November 14, 2020 under the title ‘A calibrated package’. The writer is co-head of APAC Strategy and India Strategist for Credit Suisse.
📣 The Indian Express is now on Telegram. Click here to join our channel (@indianexpress) and stay updated with the latest headlines