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Yes, it will deepen the fiscal deficit but it is worth the risk
It was either Joe Biden or the outcome of the Bihar elections that spurred the government to announced Stimulus 3.0. Most likely it was a mix of both. It is also likely that the government wanted to make a splash ahead of Diwali but that is quite understandable in a country where Goddess Lakshmi is welcomed into every home on this occasion. But it really does not matter. It must be said that the stimulus has been well timed.
Written By Shashank Gupta
Table of Content
What the stimulus entails
The stimulus is broken up into a number of items including housing, rural jobs, support for infrastructure, contribution for COVID R&D, capital contribution to small businesses etc. The total outlay has been set at Rs.265,000 crore and this is in addition to the two stimulus packages that have already been announced. However, 80% of outlay will go towards the PLI scheme and the fertilizer subsidy for farmers. The stimulus has made an allocation of Rs.146,000 crore towards product linked incentives or PLI. This will encourage global companies in sectors like pharma, electronics, textiles, cells, solar products etc to invest in India with a view to manufacture and export these products. The second major allocation is towards fertilizer subsidy for farmers including a payout of fixed fertilizer allowance. This will entail an allocation of Rs.65,000 crore and is intended to boost output of Kharif and Rabi crops every year.
Where will funds come from?
There is not much of clarity on how the funds will come because the total size of the stimulus till date has been $400 bn of which the fiscal allocations are nearly half the amount. The government is clearly betting that the collections of direct and indirect taxes would sharply pick up in the coming months as output gets back to normal. While LIC IPO does not look likely this year, there will be an attempt to earn higher dividends from PSUs and also get funds via buybacks by the profitable and cash-rich PSUs. The government may also look to the RBI monetizing the deficit, but that would be the last resort. But, funding still remains the big billion dollar issue if this stimulus program has to fructify.
What about fiscal deficit?
A number of economists have raised apprehensions about the escalating fiscal deficit. SBI Research has pegged the full year fiscal deficit for FY21 at 10.5% of GDP after the third round of stimulus. That is clearly not sustainable considering that the original target was to peg fiscal deficit at 3.5%. But the government does not have a choice as that is the only way to revive growth in a quick way. An economy like India with low levels of per-capita GDP cannot stay in low growth trajectory for too long. Under the circumstances an aggressive stimulus was the only way out. Fiscal deficit cannot be the priority now!