Indian Government Stimulus announced during Economic Crisis – 2008 vs 2020 – Part 2

In Part-1 we discussed what is stimulus and discussed the ones announced in the 2008 crisis.

Now, taking a cue from 2008 – what can we expect this time?

Can we compare the 2020 crisis with the Global Financial Crisis of 2008?

Given the nature of the Covid-19 pandemic, there’s very little knowledge about the disease and therefore about its impact – but the way economic activity has completely stalled now, it definitely is a situation, far more grave than that of 2008.

What are the stimulus announced by the Finance Ministry & RBI in March, 2020?

• Insurance cover for the frontline workers of Rs. 50 lakhs.
• Food security – 80 crore people to be benefitted under PM Gareeb Kalyan Ann Yojana.
• Cash transfers through Direct Benefit Transfers – Farmers, MNREGA, Poor Pensioners, Poor Widows, Poor Handicapped, Women Jan Dhan account holders, Women and elders under the Ujjwala Scheme, Women SHGs dealing with livelihood mission.
• Government to pay EPF contribution both of the employer and employee for the next three months for all those organisations which have up to 100 employees and 90% of those employees are those earning less than Rs. 15,000 per month.
• Construction workers: Utilize the Thirty-one thousand Cr. welfare fund for building and construction under central government scheme crore to provide support to 3.5 crore registered building and construction workers to save them from any economic disruption.
• RBI cut repo rates by 75 basis points
• RBI also slashed CRR Cash Reserve Ratio by 1 per cent to 3 per cent, ensuring liquidity in the economy and credit to all segments of society.
• The lenders have been asked to give three months of moratorium to the borrowers.
• In totality – Stimulus by the Finance Ministry sums up to Rs 1.7 Lakhs Cr.

For a more detailed report on first stimulus by FM & RBI, refer to our post dated Mar 28, 2020: Latest Announcements by FM/RBI amid Covid-19 and How it Affects You

Economy in 2008 and Economy in 2020.

The government in 2008 had bought in a stimulus of around 1% of GDP along with faster implementation of Infrastructure projects. Today our GDP is almost 3.5 times higher than the last time (Rupees Terms). Bigger economy requires a bigger stimulus to re-charge it (in percentage terms). Also, the current crisis is far bigger than the last crisis. Government in this case, will need to bring a stimulus of close to 5% of India’s GDP. Which translates to roughly 10 lakhs Crores.

Government has already introduced a stimulus of around 2 Lakhs crores, and we firmly believe it has a legroom of almost 6 – 8 lakhs crores more.

Wish List?

• Economic Package for MSME – there are more than 6 Crore MSMEs in India – Rural, Urban, Manufacturing, Trading, and Services included (MSME Ministry report 2019). They form the life line on which India runs – and they really need help now.
• Package for core sectors like coal, crude oil, natural gas, refinery products, fertilisers, steel, cement and electricity.
• Package for sectors like – Automobile, Airlines & Airports, Tourism and Travel. Sectors which have been worst hit due to the downturn.
• More work on food security for the poor
• More work on furtherment of agriculture and specially on improving the storage and supply distribution system
• Further impetus for the healthcare industry and finally understanding its importance.
• Some relaxation for the Middle-class Income taxpayers, ensuring that they get more money to spend, and also ensuring that they keep people employed.
• Big expenditure on Infrastructure to revive the economy, it is also time to reintroduce tax free bonds for spending on Infrastructure Projects. Issue size of 1 Lakh Crore tax free bonds, can give push to Infrastructure projects worth 3 – 4 lakh Crores.

Is it that simple?

There is no free lunch! It has many strings attached to it. India may have to increase its fiscal deficit which may lead to a decreased sovereign rating. Or finance it partly by printing more money which leads to devaluation of currency and inflation.

India is enforcing Lockdown at par with developed countries like the UK or USA. But is it at par with them in public spendings too? The UK and USA are all guns blazing, with stimulus packages more than 15% to 20% of their GDP, whereas India has not done much as of now. Fiscal Discipline though is much more needed for a growing economy like India. India can definitely take more steps – and India definitely will. The economic package though will only come, when the government will allow people to go back to work. That will be the most suitable time to introduce the package, spend more on Infrastructure Projects, – and finally Restart & Recharge the economy, till then it shall be an agonizing wait.