Across the Aisle by P Chidambaram: The Rs 20-lakh-crore whodunit

Absent additional borrowing, there will be no fiscal stimulus to stimulate demand in the economy. The Rs 20 lakh crore will be another jumla. We will be self-reliant (Atma Nirbhar) in jumlas.

Shops opened after around 40 days of lockdown, imposed in the wake of COVID-19 pandemic Express Photo
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In Budget 2020-21, the Central government planned to spend Rs  30,42,230 crore in the current year. The shortfall on the revenue side would be financed by borrowing Rs 7,96,337 crore. This was the budgeted fiscal deficit, equivalent to 3.5% of GDP. Coronavirus changed all those calculations. It was evident to every economist that the borrowing could not be limited to Rs 7,96,337 crore, India must borrow more; only the government was in denial.

On May 8, the government reluctantly admitted that it will borrow an additional amount of Rs 4.2 lakh crore taking the total borrowing to about Rs 12 lakh crore. The fiscal deficit (assuming no change in the estimate of GDP) would be 5.3%. Mere gap-filling I had pointed out that the additional borrowing would be a fiscal stimulus only if it was used to provide cash and other forms of support to the poorest families at the bottom half of the population and to re-start the completely stalled economy.

Worryingly, I hear that the additional amount of Rs 4.2 lakh crore will be used for ‘gap filling’. The government expects to take a big hit on estimated tax revenues and proceeds of disinvestment. If the ‘gap’ has been estimated at about Rs 4.2 lakh crore, the additional borrowing will fill that ‘gap’. This is unavoidable, but the amount of Rs 4.2 lakh crore certainly cannot be counted as a fiscal stimulus. Look at a simple statement of accounts: There is no clarity whether the government will make cuts in other items of expenditure.

The cuts announced so far will save the government Rs 41,490 crore and will be available for Covid-19-related expenditure. That expenditure will only restore the original level of expenditure and, therefore, will not amount to a fiscal stimulus. Liquidity not fiscal stimulus I suspect the government will count the mis-labelled Rs 1.7 lakh crore package announced on March 25 as a fiscal stimulus. Actually, the additionality was only Rs 60,000 crore in cash transfer plus Rs 40,000 crore being the value of the grain (not budgeted earlier). We can therefore count Rs 1 lakh crore as a fiscal stimulus.

I also suspect the government will count the RBI’s steps to provide additional liquidity as a fiscal stimulus. To confuse liquidity with expenditure is conceptual confusion. Liquidity works on the supply side, fiscal stimulus is needed for the demand side. Be that as it may, the RBI has provided additional liquidity support of Rs 5.24 lakh crore since March 27; in turn, the banks have parked with the RBI an additional about Rs 4.14 lakh crore since that date! By stretching the argument in favour of the government, if the additional liquidity translated into additional credit that carried a subsidised interest rate or is written off, perhaps the interest subsidy or written-off amount can be counted as fiscal stimulus. All that is in the realm of conjecture.

Besides, outstanding bank credit has fallen from Rs 103.8 lakh crore on March 25 to Rs 102 lakh crore today. On May 12, the Prime Minister grabbed the headline with the announcement of a Rs 20 lakh crore Economic Stimulus Package — but left the page blank! Beginning May 13, the Finance Minister started giving out the ‘details’ of the package.

The people left fuming were the (1) farmers; (2) migrants; (3) workers who had been laid off or retrenched; (4) workers in unorganised and unregistered businesses who had lost their jobs; (5) self-employed who had no work; (6) the poorest families who lived every day from hand to mouth; (7) the lower middle class that had run out of cash and was forced to borrow; and (8) nearly 5.8 crore MSMEs who fell outside the Finance Minister’s MSME package. (In the second tranche the FM announced one fiscal measure for migrants: free food grain for two months valued at Rs 3,500 crore.)

On analysing the first tranche, and giving a wide berth to the government, I concluded that Rs 3,60,000 crore may be the additional expenditure. On similar analysis, the second tranche yielded a figure of Rs 5,000 crore and the third, regretfully, nothing clear. Expenditure sans borrowing? All these numbers, I am afraid, miss the central issue. Additional expenditure is possible only if there are additional revenues/resources.

If not, we are stuck with the budgeted expenditure of Rs 30,42,230 crore. On additional revenues/resources, the government is ominously silent. Let me state categorically, if there is no additional borrowing, there can be no additional expenditure and, logically, no fiscal stimulus.

All over the world, additional borrowing is the key to fiscal stimulus: borrow more and spend more, and if the borrowing reached an uncomfortable level, monetise part of the additional borrowing/deficit, that is, print money. Absent additional borrowing, there will be no fiscal stimulus to stimulate demand in the economy. The Rs 20 lakh crore will be another jumla. We will be self-reliant (Atma Nirbhar) in jumlas.

Website: Twitter @Pchidambaram_IN

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