Fiscal Stimulus Package, India-2020

The Covid-19 pandemic has moved the global economy towards an unprecedented crisis. Some countries are experiencing their worst economic fallouts. These widespread economic disruptions have forced governments globally to take extraordinary measures. The governments have pledged vast sums of money as the fiscal stimulus to revive economic activities. Fiscal stimulus refers to measures taken by a government to keep more money circulating in the economy either by reducing taxes or by increasing government spending. Like other countries, India too is witnessing its first full-year contraction in four decades. According to the IMF, India’s economy is projected to contract by 10.3 percent in 2020. The pandemic induced lockdown in March brought most of the economic activity to a standstill. Nearly 12 crore people lost their jobs in April. Demand fell, both domestically and internationally, and fiscal deficits increased.

To set the economy back on track, the government announced an Rs. 20 lakh crore fiscal package in May. The package consists of a combination of fiscal support, monetary support, and fundamental reforms to make business’ processes easier, making it one of the largest fiscal packages internationally. It was announced in five trenches. The first tranche provides credit support to small businesses and banks. The second tranche provides free food grain to migrant workers and credit to farmers. The third tranche focuses on improving agricultural infrastructure. The fourth and fifth tranches aim at bringing structural reforms. The package claims to cater to various sections, and if the funds are distributed effectively, it can prevent further slowdown of the economy.

 Small and medium scale industries in semi-urban and rural areas suffered the most because of the pandemic. Hence, the government’s decision to provide them relaxation in loans would help them get back to the state of normalcy. The agricultural sector is also likely to get a boost with the proposed package. Other measures include pension fund support, temporary tax cuts, a fund for post-harvest ventures, and fund to protect employability in rural areas are also expected to act as a cushion for the economy.  

Despite its far-reaching course, the package has still been subject to criticism. Many economists believe that the package will not have any significant economic impact and have thus pitched for more fiscal measures. Even though the government claims it to be around 10 per cent of the size of GDP, the package includes monetary measures that were already budgeted by the government and the RBI. These monetary measures constitute most of the part of the package making the actual fiscal impact of the additional stimulus only about 1 percent of GDP size. Additionally, the Modi government’s 20 lakh crore stimulus package focuses more on the supply side aspects and less on the demand side measures. The measures are not expected to boost consumer spending as they do not provide citizens with direct cash. Indian economy relies heavily on its service sector. Service industries, such as hotels and airlines, which contribute significantly to the country’s GDP, received very little attention in the package. According to the new rules on MSME definition, investment and turnover limits have been modified. Resultantly, some of the businesses will fail to avail credit benefits as they may not meet some of the requirements. With declining revenues and limited resources, the government will be forced to fund its expenditures by domestic borrowing. This will result in higher interest payments and will divert away resources from more productive spending.

Apart from the reforms included in the package, the government will have to come up with additional measures to create more demand in the market. The most crucial step in this direction would be to create more jobs according to the needs of people. The government should invest in large scale infrastructure projects like construction of roads, bridges etc. to further increase the demand for workforce, goods, and services in the economy. Strengthening of rural infrastructure to boost agro-based industries can be another major step. The government should promote export-oriented sectors and direct its policies towards the manufacturing sector to reduce India’s dependency on imports. The demand can also be increased by giving direct cash to workers who lost their jobs as compensation. The package seems to be promising, but its benefits could only be maximised if the government chooses to use it optimally.  

Kritima Bhapta

Kritima Bhapta is a postgraduate student in Economics from Nanyang Technological University, Singapore,
She aspires to be an Economist and has a keen interest in Development Economics.

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