IMPACT OF RUPEES 20 LAKH CRORE RELIEF PACKAGE ON THE INDIAN ECONOMY
Recently, with a view to give relief to various classes of economy, PM Modi has announced a stimulus package worth Rs. 20 lakh crore. The package was aimed to save the lockdown-lashed economy and focused majorly on tax breaks for small businesses along with some well-thought incentives for the manufacturing unit. The package is planned to focus primarily on land, labour, liquidity, and laws. The amount of stimulus package is inclusive of all the packages announced during the lockdown and roughly works out to be 10% of the GDP. The percentage of relief packages stands 3rd in the world after Japan and the USA. This is a great step by the government to fight the current pandemic and bring the lives back on track.
However, one thing that we are overlooking is the economic impact of the stimulus package. Will this economic package actually benefit the economy or not? Many experts and analysts have outlined that the package announced by the government has not fulfilled many expectations. The package is said to cover many aspects but will also incur significant costs to the government. Now, the question arises — where will all this money come from? Let’s see the stimulus by the government and their impact in detail:
Stimulus packages with cost to government:
The government has announced several packages to cope with the pandemic, the package focused on various sectors such as:
MSMEs
1. Sub-ordinate debt to MSMEs: The total amount of package stands at Rs. 20,000 crores and is aimed to provide debt to MSMEs which are sick or NPA. The promoters of MSMEs shall be extended the credit facility, the funds out of which shall be utilized for infusing equity in the unit. The total cost to the government shall be Rs. 4000 crore.
Pros:
a. Sick MSMEs could be able to make a comeback and capture the better market. This will contribute to the growth of GDP.
b. Banks’ NPA should be reduced to some extent.
Cons:
a. The huge cost to the government will increase the fiscal deficit in the economy.
b. It might be possible that the interest rates on loan shall be increased in the future and will come at a higher cost to the MSMEs.
Benefit of Poor
2. PM Garib Kalyan Package: Under this package, the government will give 5 kg of wheat and other food grain to the poor and farmers and will deposit Rs. 500 in every Jan Dhan account. The total cost to the government shall be Rs. 1,70,000 crore.
Pros:
a. The crops lying with the farmers will be utilized and therefore, they could benefit from it.
b. The daily wage earners who are dependent on daily income will get relief and could be able to feed their families.
Cons:
a. Huge costs to the government and hence the gap would be substantial in the fiscal deficit. Since the cost is huge the government will try to recover some of it from the general taxpayers, which might burn a hole in their pockets.
b. When a crop is sold in a market, many people benefit from the same and hence it contributes to the entire cycle. However, the government will purchase directly from the farmers eliminating those intermediaries, this might impact the income of those intermediaries, due to which the employment rate shall also be reduced.
3. Interest subvention on Mudra Loan: The government has announced that the interest rates shall be reduced for loans given under the Mudra Loan scheme. These loans are generally given to farmers. The cost to the government shall be Rs. 1500 crore.
Pros:
a. Farmers shall benefit out of the same and the burden shall be reduced.
b. This will regulate the debt sector and NPAs in the bank could also be reduced.
Cons:
a. There are chances that the impact of this shall be long-term as saving rates would be reduced and borrowing rates will be increased due to an increase in credit demand.
b. Right now we could see that the economy is benefitting but the fact that the long-term impact of such relaxations cannot be overlooked.
Salaried and other Individual
4. EPF Contribution: The government will pay EPF contribution of the companies employing less than 100 employees and 90% of whose employees are drawing salary up to Rs. 15,000. The government will contribute in the place of both employee and employer. This will cost the government about Rs. 2500 crore. Earlier the said benefit was announced for three months only, later on it has been extended till August 2020. The rate of contribution by employer and employee has also been reduced to 10% for all establishments covered under EPFO.
Pros:
a. EPF Contribution due to the crisis will not be on halt and the employees could continue with their savings amidst the crisis.
b. The burden of small employers shall be reduced and the business could benefit substantially.
Cons:
a. The cost to the government shall be huge and to recover the same there are chances that the burden on employees could be increased later on in the form of making some provision for tax on EPF, etc.
b. We are also predicting that the interest rates on deposits shall also be decreased to cope with the situation that would come up later on.
There are other packages in the form of support to migrant workers, street vendors, CAMPA Funds, emergency funds to farmers, additional funding of Rs. 40,000 crores for the MNREGA scheme to improve livelihood in rural areas and Housing Loan interest subsidy. This will incur a total cost of 1,55,502 crore to the government. The entire package will cost the government about Rs. 3,20,902 crore. While we are looking at the benefit given to the poor and needy, we are assuming that the effect of the same shall be long-term. However, it might not hold true for the post-pandemic situation.
The fiscal deficit would increase substantially and GDP growth would be slumped by an unexpected percentage if it goes on like this. To cover this cost, the government will adopt measures that would fill the fiscal deficit gap but where would the money come from? It is obvious that most of it shall be recovered from us. It might be in the form of an increase in taxes, especially indirect taxes — GST. Right now, there are several items in the negative list of GST which could be amended and become liable to tax, or revision in GST rates is another possible measure that the government could adopt.
Stimulus packages with no cost to government:
This involves measures aimed at increasing the liquidity in the economy and providing relief to banks, financial institutions, etc. The government has announced several packages under this as well, such as Reduction Cash Reserve Ratio (CRR), Targeted Long-term Repo Operations (TLTRO), Special Refinance facility and Special Liquidity Facility (SLF), Partial Credit Guarantee, Payment to DISCOM, Working Capital for Agri Entities, Refinancing NABARD, the extension of due dates for filing of income tax, income tax refunds, equity infusion in some companies. All these measures are taken by the government to increase the liquidity in the overall economy, to back banks and other sick financial institutions, individuals in general, and are situation-centric, and we are assuming that the economy will benefit out of the same.
Besides this, the government has also placed a keen focus on ‘one nation, one ration card’ under which migrant workers shall have access to Public Distribution System (PDS) benefits from any Fair Price Shop in the country. This is a great initiative for the migrant workers as we can see how much they are suffering due to this pandemic. However, experts and analysts have a completely different opinion in this regard. If we talk about the income-tax refund, it is the money of public the government is returning which should have been returned much earlier. On the other hand, extension in due dates has relaxed the taxpayers but will also decrease the investment period for the coming year resulting in lower deductions for the individuals.
While the nation fights with the pandemic to keep the lives safe, we hope that the economy stays safe as well.
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