20 Lakh Cr Economic stimulus has strong supply-side measures, but lacks on the demand side

20 Lakh Cr Economic stimulus has strong supply-side measures, but lacks on the demand side

28 May 2020

The impact of COVID-19 could be disruptive on the Indian economy, as the number of infected cases is growing at a faster rate, and have crossed the 100,000 mark recently. The IMF, World Bank and the UN have released a warning on the world economy due to the pandemic, while many rating agencies have downgraded India’s credit ratings.

Goldman Sachs expects the Indian economy to contract by a massive 45% in the June quarter, and has projected a 5% fall in the Gross Domestic Product (GDP) for 2020-21. The UN recently released its economic forecast, and slashed India’s growth projection for the current fiscal year to 1.2 per cent, which is still on a positive note. The growth trajectory in India could be the second-highest growth rate among major economies, after China. According to the report, world economic growth is projected to shrink by 3.2 per cent this year. Developed countries could face turmoil, as economic growth could drop by as much as 5%.

Abans Research, India’s GDP growth rate (Quarterly)

Back home, the Government of India went in an aggressive mode, and announced a Rs. 20 lakh crores economic stimulus package, along with significant reforms. This stimulus had a long-term mission to make India independent, as regards manufacturing, and reduce imports. If successfully implemented, India can play a lead role in the global supply chain.

The overall stimulus provided by the Aatmanirbhar Bharat Package is as under:-

Abans Research, Stimulus announced by the FM (Amount in Rs. Crore)

This package is for a strong supply-side push. Let us see below some important highlights of this package, which were announced in 5 different tranches:- 

  • Rs. 3 lakh crores relief package for MSMEs
  • Introduction of the ‘One Nation One Ration Card’, which will include all, and improve the PDS system
  • Amendment of the Essential Commodities Act (ECA), 1955, and agricultural marketing reforms through a Central law
  • Commercial coal mining and coal gasification projects
  • Civil Aviation - building a hub for aircraft maintenance, repairs and overhaul (MRO), privatization of airports, and optimization of Indian airspace
  • MNREGA – allocation of an additional Rs. 40,000 crores, over and above the Budget
  • Debts that are related to COVID-19 to be excluded from defaults under IBC, and no fresh insolvency proceedings to be initiated up to 1 year
  • Relaxation of provisions in the Companies Act to decriminalize minor technical and procedural violations  
  • States have been allowed to increase net borrowings up to 5% of Gross State Domestic Product (GSDP), from 3% existing
  • Privatization of non-strategic PSUs

The government has done a lot on the supply side by bringing this package. Goldman Sachs expects a strong sequential rebound of 20% in the September quarter. The government has also taken steps to ease liquidity through the availability of cheaper loans. If successfully implemented, this stimulus could improve the conditions of MSMEs, private sector players, and can also prevent some of the job losses that are bound to happen.

Still, demand is going to play a considerable role in the economic revival. An extended lockdown in the red zones could be disruptive, as these zones account for nearly 45% of GDP. Recovery in demand could be seen once the lockdown is lifted completely, and the movement of people is allowed.

The world is waiting for a successful medicine to cure the coronavirus, with adequate supplies in the larger interests of the global populace. Till such time, people should build herd immunity to fight the coronavirus, and the government should start easing the lockdown in a phased manner. We believe that the demand-side stimulus from the government can only take place at a later stage, in case the COVID infection does not become less intense, or a second wave prompts another lockdown.