Update on Government stimulus – Part II
Economic package unlike to stimulate demand immediately
While the stimulus of ` 21 lakh cr. by the Government at 10% of GDP may seem
large it is still smaller in size as compared to the stimulus packages announced by
other countries like the US which has announced monetary and fiscal stimulus of
~25% of GDP so far with more expected to follow. Our stimulus also relies more
on providing credit to the economy and little in the way of cash spending by the
Government. The package also includes earlier measures announced by the RBI &
government and therefore the quantum of new measures are much lower at ` 11
lakh cr. (~5.5% of GDP).
Given that the Government lacks fiscal space to provide direct stimulus to the
economy in the form of cash spending we believe that they are trying to do the
next best thing by ensuring adequate credit flow to essential sectors like
agriculture, MSME and Power in order to ensure that the economy doesn’t come to
a standstill. Effectiveness of the measures announced so far will depend on the
actual flow of credit to the economy given that banks have been so far risk averse
Increase in state Government borrowing limits too have been tied up to market
reforms on agriculture and power sector which should force the state Governments
to do structural reforms which have been long pending. We believe that this will
force state Governments to implement tough structural reforms which will benefit
the economy in the medium to long term.
Easing of lockdown is positive though concerns still remain
The Government has also announced an extension of lockdown till the 31
2020 though with greater relaxation. The Government has either fully or partially
lifted some of the restrictions subject to state approvals. Some of the key changes
are listed below:
Allowing intra state movement of people using passenger vehicles and buses
as decided by the states. Interstate movement of people will also be allowed
based on mutual consent of the states/UT involved.
All non essential shops are allowed to open except for those within malls and
Delivery of non essential items by e-commerce platforms while restaurants will
be allowed to operate kitchens for home delivery only.
There have been other minor relaxations allowed by the Government though
significant portion of the economy including educational institutions, domestic &
international air travel, malls, hotels and metro rail services will remain closed.
Therefore we expect a very gradual rebound in economic activities from here on as
more businesses resume operations in a phased manner.
However there has been a mass movement of migrant workers from urban to rural
areas over the past week as they returned to their hometown. While rural areas
have largely remain unaffected from the virus there is a possibility that there could
be a surge in new cases after a few weeks if there is a spread of the virus from
urban to rural areas. If that were to happen then the recovery will get derailed as
Governments could be forced to roll back some of the relaxations.
New measures announced by
Government at ~5.5% of GDP is
Linking borrowing limit to reforms
may force states to implement
Easing of restrictions would lead to
increased economic activities
However significant portion of
economy still remains shut and
recovery to be gradual at best
Spread of virus from urban to rural
areas is the biggest risk