In an attempt to tackle the economic crisis triggered by the Covid-19 pandemic, Government of India announced a Rs. 20 lakh crore Atmanirbhar Bharat Abhiyan financial package, equivalent to 10% of India’s GDP. In this post, Dey and Kundu present a detailed analysis of the package and contend that the actual stimulus component is only about 1.27% of GDP. They propose a modified package equivalent to 5% of GDP, with a focus on stimulating demand in the economy.

On 11 May 2020, when the entire nation was reeling under the adverse shock of lockdown due to the Covid-19 pandemic for over 50 days, PM Modi made a sudden announcement of a Rs. 20 lakh crore (10% of India’s GDP) financial package for Atmanirbhar Bharat Abhiyan in order to boost the economy. Although this package is termed by the government as fiscal stimulus, the question remains as to what extent it can be considered as stimulus. To address this, we undertake a detailed analysis of five tranches of government’s proposed monetary injection to combat the economic crisis.

But first we take a step back and see whether such fiscal measures may be effective to address the prevailing demand deficiency in the economy without leading to higher levels of inflation. The answer to this question has a wider implication in the current context. This is because we observe that rather than seeking to enhance aggregate demand in the economy by inducing consumption spending in a full-fledged manner, the government has given more importance to easing supply constraints. This has been done through various ways of infusing credit or soft loans in the productive sectors of the economy, and by introducing long-term investment proposals including structural reforms in strategic sectors. Generally, these prescriptions could be fruitful during a crisis period to induce domestic or foreign private investment and creating productive capacity. This is relevant if the industrial sectors of the economy do not have excess capacity; in such a scenario, a sudden shock of increasing aggregate demand through fiscal stimulus would lead to inflation.

However, the Centre for Monitoring Indian Economy (CMIE) outlook of August 2019 depicts that private corporates show no sign of fresh investment in capacity creation due to the existence of excess capacity in industrial sectors and falling returns on investment expenditure. Further, the falling demand in both the rural and urban economy provides negative indication to the corporates to invest afresh (Swamy 2019). This is the pre-Covid scenario. Considering the nature of the present economic crisis, along with the prevailing pre-Covid situation, one can comprehend that the efficacy of fiscal stimulus in enhancing aggregate demand by stimulating consumption spending leaves no ambiguity and hence, the process is non-inflationary. However, a careful analysis of the proposed financial package by the government raises doubts around the very notion of the entire process. We argue in the following analysis that in most of the cases, the basis of providing financial incentives reflects lack of clarity from the point of view of fundamental macroeconomic logic.

Analysing the financial package

We disaggregate the entire package under five broad heads (Tables 1-5 below), based on the announcements made by the Finance Minister. Allocation of funds could be considered as fiscal stimulus if the funds would come in the hands of people unconditionally (unconditional cash transfer), in a way that directly enhances the aggregate demand of the economy by inducing consumption spending by the masses. However, we can observe from Table 1 that a large share of allocation of funds in the first tranche are meant for Micro, Small, and Medium Enterprises (MSME), Non-Banking Financial Companies (NBFC), Housing Finance Companies (HFC), and Micro Finance Institutions (MFI). These are liquidity provisions, which are either in the form of loan or what could be considered as long-term investment with hardly any immediate impact on the economy that has been experiencing slackening demand. In a situation where demand deficiency and that too due to weak consumption spending is the most critical factor, measures to boost private investment spending by infusing additional liquidity provisions does not leave any room for reviving an economy that is engulfed in demand uncertainty. Without ensuring sufficient demand by boosting consumption, credit-induced investment growth would eventually fail to bring the economy to a normal path since excess capacity already exists in the Indian manufacturing sectors.

Table 1. Allocation of funds: Tranche 1 of financial package

SN	Items	Fund allocation (Rs. Cr.)	Remarks	Actual fiscal stimulus (Rs Cr.)
1	Emergency working capital facility for businesses, including MSMEs	300,000	It is a loan. Moreover, current unpaid dues of entire MSME sector by Government of India is Rs. 5 lakh crores (Source: https://thewire.in/business/nitin-gadkari-msme-unpaid-dues)	0
2	Subordinate debt for stressed MSMEs	20,000	Same as above	0
3	Fund of funds for MSMEs	50,000	Same as above	0
4	Employees’ Provident Fund (EPF) support for businesses and workers	2,800		2,800
5	Reduction in EPF rates	6,750		6,750
6	Special liquidity scheme for NBFC/HFC/MFIs	30,000	It is a liquidity provision and government investment, not a fiscal stimulus. Hence this is a long-term investment plan	0
7	Partial  credit guarantee scheme 2.0 for liabilities of NBFCs/MFIs	45,000	Again, this is a liquidity provision for MFI/NBFCs. Hence this is a long-term investment plan	0
8	Liquidity injection for DISCOMs (power distribution companies)	90,000	Liquidity provision to encourage private player for long-term investment in power sector	0
9	Reduction in TDS/TCS (tax collection/deduction at source) rates	50,000	It is a kind of tax cut	50,000
Sub Total		594,550		59,550

Although the reduction in EPF (employees’ provident fund) rate is about Rs. 6,750 crore, which can directly boost aggregate demand by raising consumption spending, the efficacy of such fiscal stimulus depends on the number of workers who come under the social security safety net. Ironically, the Periodic Labour Force Survey shows that around 50% (52.5% for rural and 47.7% for urban) of the regular wage/salaried employees are not eligible for any kind of social security benefit including EPF (2017-18). Hence, the reduction in EPF rate and its impact on the economy leaves several doubts as a large share of the workforce in India is engaged with informal contract without any social security benefit.

Overall, our estimation shows that around 10% of the total sum allocated (Rs. 594,550 crore) in the first tranche could be considered as fiscal stimulus.

In the second tranche (Table 2), there are three initiatives – supply of foodgrain to migrant workers for two months; interest subvention for MUDRA (Micro Units Development and Refinance Agency Ltd.) Shishu loans (up to Rs. 50,000 loan amount); and Housing Credit Linked Subsidy Scheme (CLSS) – through which the government seeks to provide more cash in the hand of people worth Rs. 75,000 crore altogether, which stands at around 24% of the total funds allocated in the second tranche. However, it is noteworthy that by the end of March 2020, the foodgrain stock (rice and wheat) in the Central pool was around 584.97 lakh metric tons (Food Corporation of India, 2020), which is excess and hence, releasing a portion of this stock worth Rs. 3,500 crore is in fact reducing the government’s burden of maintaining buffer stock. Hence, one should be critical whether aforementioned sum of money should at all be considered as a fresh injection for our struggling economy.

Table 2. Allocation of funds: Tranche 2 of financial package

SN	Item	Fund allocation (Rs. Cr)	Remarks	Actual stimulus (Rs. Cr.)
1	Free foodgrain supply to migrant workers for two months	3,500	Although FCI has excess foodgrain stock, it is still a direct transfer in kind	3,500
2	Interest subvention for MUDRA  Shishu loans	1,500	It is a grant	1,500
3	Special credit facility for street vendors	5,000	It is a loan	0
4	Housing CLSS – MIG (middle income group; annual income of Rs. 6-18 lakhs)	70,000	It will reduce the interest burden on housing loan and hence reduce EMI (equated monthly instalment)	70,000
5	Additional emergency working capital through NABARD (National Bank for Agriculture and Rural Development)	30,000	It is a crop loan; liquidity provision only	0
6	Additional credit through KCC (Kisan Credit Card)	200,000	It is a  loan for famers; no interest waiver	0
Sub-Total		310,000		75,000

The third tranche was mainly focused on investment in infrastructure and skill upgradation, in agriculture and allied activities (Table 3). However, careful observation reveals that a significant portion of the allocation was already made in the Union Budget in February 2020 and hence, it is hard to consider the entire sum as a fresh investment of Rs. 150,000 crore to pull the economy out of the present crisis. Above all, the long-term investment in infrastructure including strengthening supply chain and skill upgradation may ease the supply constraint in agriculture and allied activities; however, considering the current situation of demand constraint faced by the economy, such a strategy cannot squarely address the present crisis and this is contrary to the core idea of actual fiscal stimulus required to ease demand constraint.

Table 3. Allocation of funds: Tranche 3 of financial package

SN	Item	Fund allocation (Rs. Cr.)	Remarks	Actual fiscal stimulus (Rs. Cr.)
1	Food micro enterprises	10,000	Government’s investment for skill upgradation for micro food enterprises	0
2	Pradhan Mantri Matsya Sampada Yojana	20,000	Government investment for technology, infrastructure, and skill development in fisheries industry	0
3	TOP (tomatoes, onions, and potatoes) to TOTAL (all fruits and vegetables): Operation Greens	500	Government investment to improve the supply chain infrastructure in fruit and vegetables	0
4	Agri-Infrastructure Fund	100,000	This is a government investment and it was fully included in the Rs. 2.83 lakh crore agriculture budget in the Union Budget in February 2020	0
5	Animal Husbandry Infrastructure Development Fund	15,000	Same as above	0
6	Promotion of herbal cultivation	4,000	It was already included in the AYUSH department’s budget under the Union Budget in February 2020	0
7	Beekeeping initiative	500	It was already included in the Union Budget in February 2020	0
Sub-Total		150,000		0

On fourth day of announcement, the focus was on structural reforms in coal, minerals, defence production, power distribution, civil aviation, and space and atomic energy sectors. Considering the present scenario and the nature of the crisis, such initiatives cannot drives the aggregate demand of the economy in the short run; although this might induce foreign capital inflow given uncertain domestic investment. On account of similar logic, viability gap funding worth Rs. 8,100 crore, which is government’s investment in infrastructure, provides no immediate incentive to stimulate private consumption spending (see Table 4).

Table 4. Allocation of funds: Tranche 4 and 5

SN	Item	(Rs. Cr)	Remarks	Actual fiscal stimulus (Rs. Cr.)
1	Viability Gap Funding	8,100	This is the government’s share of investment in social infrastructure	0
2	Additional MNREGA (Mahatma Gandhi National Rural Employment Guarantee Act) allocation	40,000		40,000
Sub-Total		48,100		40,000

The only segment of the fifth tranche of financial assistance that would directly boost consumption spending is the additional allocation of fund meant for MNREGA (Mahatma Gandhi National Rural Employment Guarantee Act) programme worth Rs. 40,000 crore.

If we sum up the entire stimulus package including the previously announced relief package of Rs. 192,800 crore along with RBI (Reserve Bank of India) measures worth Rs. 801,603 crore (see Table 5), it is hardly an acceptable fact that the entire cash will be transferred into the hands of the poor and marginalised people. For instance, it is claimed by the government that the sum of Rs. 170,000 crore out of Rs. 192,800 crore is allocated to Pradhan Mantri Garib Kalyan Yojana (PMGKY); however, the actual figure stood at around Rs. 62,000 crore. Similarly, RBI measures in terms of providing liquidity to government cannot be considered as fiscal incentives until and unless this amount is been entirely or partially distributed in the form of fiscal package to the masses.

From Table 5, it is evident that if we sum up the actual allocation of the entire package meant for fiscal stimulus to combat the crisis, it would be around 1.27% of the GDP rather than what is claimed by the government.

Table 5. Overall Stimulus provided by Atmanirbhar Bharat package

SN	Item	(Rs. Cr.)	Actual fiscal stimulus (Rs. Cr.)
1	Part 1	594,550	59,550
2	Part 2	310,000	75,000
3	Part 3	150,000	0
4	Parts 4 and 5	48,100	40,000
	Sub-Total	1,102,650	174,550
5	Earlier measures including PMGKY	192,800**	62,000+7,800+15,000=84,800
6	RBI Measures (Actual) (This is entirely liquidity provision, which can only translate into fiscal infusion if government borrows from that provision and distributes as fiscal package)	801,603	0
Sub-Total		9,94,403	84,800
GRAND TOTAL		20,97,053	2,59,350
In terms of share of GDP		10.29%	1.27%

Note: (i) ** Rs. 192,800 crore = 170,000 crore is PMGKY + 7,800 crore as revenue lost due to tax cut + 15,000 crores as PM’s announcement for the health sector. (ii) A back-of envelope calculation shows that the total budget commitment for all the measures announced under the 170,000 crore for PMGKY is not more than Rs. 62,000 crore (Nair 2020).

Fiscal stimulus across countries

Developed countries like Germany, UK, France, and US have undertaken several fiscal measures that are directly in line with consumption-led Keynesian approach, contrary to the Indian case where a credit-linked approach has mostly been followed. In Germany, for instance, the announced fiscal package is worth €156 billion (4.9% of GDP), which includes direct intervention to preserve workers’ jobs and incomes, grants for self-employed and small businesses, and extension of the duration of unemployment insurance. Besides, 24% of GDP has been allocated to extend help to firms to get access to public guarantee. Similarly, UK has adopted fiscal measures that include direct income support in the form of paying 80% of the income earned by self-employed and furlough employees, and £1 billion package to support firms through grants and convertible loans. France announced fiscal relief worth €110 billion (approximately 5% of GDP), which includes postponement of social security and tax payment for companies, support for wage workers, direct financial support to microenterprise and SMEs (small and medium enterprises), and extension of unemployment benefits. The US has proposed a fiscal stimulus of around 11% of GDP (US$ 2.3 trillion) in the form of tax rebate; unemployment benefits; and benefits for small businesses to enable them to retain workers, and forgiving their loans (International Monetary Fund, 2020). Considering the large proportion of informal workers and informal self-employed in India, the government could have spent a significant portion of the fiscal stimulus to provide direct income support to the marginalised groups, which is the only direct channel that can arrest the falling demand in the economy. Robust demand in the economy would eventually lead to positive feedback to the industrial sector to initiate investment in the economy, which will have further multiplier effects on the economy.

Conclusion and way forward

At this juncture, the pertinent question is whether there is any alternative strategy that could effectively address the economic crisis. After careful consideration of the current situation, we propose an alternative. Till date, 29.84 crore bank accounts have been opened under Jan Dhan Yojana, with 38.35 crore beneficiaries (28.3% of the Indian population). Direct cash transfer of Rs. 5,000 in each bank account for the next three months would cost around Rs. 5.76 lakh crore (2.81% of India’s GDP). This is the immediate strategy that can solve the effective demand problem in the economy.

Besides, there are around 6 crore active bank account holders who are actively participating in MNREGA programme. Increasing their average daily wages from Rs. 200 to Rs. 400 will cost an additional Rs. 50,000 crore (0.25% of GDP) to the government’s exchequer. This is another way of infusing cash among the people that would eventually induce consumption spending in the economy.

Another way of channelising fund is to transfer the sum to the group account of self-help groups (SHGs). In India, currently there exist 65 lakh SHGs involving almost 7 crore women, mostly in rural areas. One-time grant of Rs. 1 lakh in each group account would cost around Rs. 65,000 crore (0.32% of GDP).

Similarly, PM-KISAN is another channel of infusing cash in the rural economy. Currently, there are 8.5 crore account-holders under this schemes who receives Rs 6,000 per annum directly in their account. If an additional sum of Rs. 4,000 could be provided for the next six months to these account-holders, it would be worth Rs. 34,0000 crore (0.17% of GDP). During 2019-20, the government disbursed loans worth Rs. 3.24 lakh crore to the MSME sector at a 7% per annum interest rate, through MUDRA. Considering the post-Covid-19 scenario, if the government forgoes the loan interest income for the next two years, the total forgone amount would be around Rs. 45,300 crore (0.22% of GDP). Another step to help the agriculture sector would be to enhance the fertiliser subsidy from Rs. 80,000 crore to around Rs. 1 lakh crore (0.1% of GDP).

There is an urgent need to enhance the fund allocation for health sector. For last several years, the budgetary allocation for the sector has varied from 1% to 1.28% of GDP. We propose that this should be increased from the current share of 1.28% to 2.28%, which would cost around Rs. 2.05 lakh crore. There is also an urgent need to introduce a special health insurance package for doctors and health workers who have been devoting their lives to save millions of lives in India. One-time grant of Rs. 6,000 (0.06% of GDP) is very much in need. Last but not the least, the government must allocate 0.1% of India’s GDP towards Covid-19 research fund that would not only address the present health and economic crisis but would also help to chalk down the future plan of action to tackle a similar kind of catastrophe.

The overall special financial package (summarised in Table 6 below) worth Rs. 10.24 lakh crore would be equivalent to 5% of GDP. This would be sufficient to revive the economy.

Table 6. Proposed allocation of funds for special financial package

Source: Authors’ Calculations.

There are three ways that can be extensively used by the government to accumulate funds for this special financial package. First, government can borrow the funds from the RBI. Second, government can undertake initiatives to recover non-performing assets (NPA). According to RBI’s estimates, public sector banks had NPAs of Rs. 10.39 lakh crore in 2019. Finally, government can also introduce a Covid-19 cess along with special wealth tax to manage its finances.

The major challenges that India is going to face in the aftermath of the Covid crisis are imminent. Considering the loss of livelihood of the informal workforce, which constitutes around 90% of the total workforce in India, the present financial package hardly throws any light on addressing their issues. Disinvesting the strategic sectors in the name of Atmanirbhar package will not alleviate the plight of the marginalised groups.