Lack of such a package may lead to a far greater damage to livelihoods, economy and financial sector, CEO Kant warns.
Estimating the economic cost of the Covid-19 epidemic to be huge, the NITI Aayog has proposed a massive fiscal stimulus of over Rs 10 lakh crore or 5% of the gross domestic product (GDP) to address the situation. The package envisaged by the think tank includes income support to the poor, equity support to corporate India, absorption of a portion of NPAs in MSME sector and additional investments in healthcare. While the potential decrease in GDP size itself will raise the Centre’s fiscal deficit expressed as fraction of it to 4% in FY21 from the budgeted 3.5%, the proposed fiscal stimulus could widen it to an unheard-of 10.5% of GDP.
Given that the Centre’s fiscal resources are constrained, the Reserve Bank of India (RBI) may need to finance a portion of this incremental government stimulus, the government think-tank said. The special spending could be ring-fenced within a special Covid-19 budget, rather than as part of the general budget, it added.
“Not implementing a concerted stabilisation package in a timely fashion may lead to a far greater damage to livelihoods, the economy and the financial sector, with far worse macro-economic consequences… debt-to-GDP could still rise to 95-100% due to reduced GDP,” the think tank’s CEO Amitabh Kant said in a presentation to the CII.
Many global economies have announced much bigger stimulus and stabilisation measures such as Germany and the UK at over 20% of GDP while the US and Singapore packages are 15% of their respective GDPs. China has announced a package worth 9% of GDP.
In one scenario seen by the think tank, India’s GDP could decline by 2-3% (y-o-y) in FY21 as restarting supply chains and normalising production and consumption will take 3-4 months. In another potential scenario, the GDP could decline by 8-10% in FY21 if the lockdown continues in Q1 and additional lockdown is imposed in Q2 and Q4 due to virus resurgence (see chart).
In the first scenario mentioned above, output decline in Q1FY21 compared with Q4FY20 will be highest in airline and hotels with 70-75% compression, followed by auto and advanced industries (50-60%), construction and real estate (50%), textiles (50%), freight and logistics (40-45%), metals and mining (35-40%) and oil & gas (20-25%).
Niti Aayog cautioned that unemployment risk and social unrest could rise materially with possible displacement of over 3 crore workers. It also warned that solvency risk to the financial system is high if the economic impact is not mitigated in the next 2-3 months.
With incremental NPA across banks and NBFCs to be Rs 8.1 lakh crore or 7.3% (of advances) if lockdown continues till mid-May (the government has already extended it till May 3), the NITI Aayog said the core Tier 1 capital of banks will be around 12% or only slightly more than net unprovided NPAs of 10.9%.
“The inflationary effects of the fiscal stimuli may be low, as lockdown leads to severe demand contraction, and the fiscal support provided would be substitution of expenditure, rather than additional stimulus — without stimulus consumption can contract by about 2%, while with stimulus, consumption can grow at about 5% (in line with historical 6-7% growth), and hence, not inflationary,” the think-tank said.
The Centre has already announced Rs 1.7 lakh crore package to address the current situation (the budgetary component of this is seen at about Rs 75,000 crore). While a large part of this is direct benefit transfer (DBT) to the vulnerable sections of population, another package comprising reliefs to the MSMEs and exporters is in the works.
The Niti Aayog suggested income support programme of Rs 3.1 lakh crore to 6 crore permanent and contractual workers in the corporate sector and 13.5 crore informal workers and contractors. It also estimated Rs 70,000 crore additional expenditure in healthcare. Among other big fiscal sops, it suggested Rs 2.3 lakh crore capital support (preferably equity) to large corporates in a troubled asset relief programme (TARP) and Rs 1.7 lakh crore credit guarantee fund to absorb likely NPA slippage and credit costs. Certain proposals with no fiscal impact suggested include Rs 2.5 lakh crore RBI forbearance to reduce capital constraints (by rolling back capital conservation buffers) and Rs 1 lakh crore equity support to banks, housing finance companies and NBFCs via a TARP.
Besides the fiscal stimulus, shortfall of Rs 2 lakh crore in tax revenues, Rs 1.1 lakh crore in disinvestment receipts and additional stimulus in the form of payment of governments’ unpaid dues, will push the Centre’s fiscal deficit to Rs 21.1 lakh crore in FY21, the Niti Aayog said. With states’ projected fiscal deficit at 2.6% (to rise significantly as they will spend more and revenues will falter), the combined fiscal deficit of the Centre and states would be 13.1% in FY21, it added. The combined deficit should have been less than 6% in business-as-usual scenario.