The third tranche of the Atmanirbhar Bharat package, announced by Finance Minister Nirmala Sitharaman last week, has a multi-sector focus across the labour market, stressed sectors, social welfare, manufacturing, housing, infrastructure, exports and agriculture. Some of the schemes are time-bound, while others have a medium-term focus.
Some schemes stood out in particular, for instance the extension of the 100 per cent credit guarantee scheme to 26 stressed sectors with credit outstanding in the Rs 0.5-5 billion range. Additional credit to these firms can be up to 20 per cent of outstanding credit, payable over 5 years. The extension of the Production Linked Incentive scheme to ten new sectors is also likely to boost manufacturing over the medium term.
Having said that, stringent qualifying conditions in some schemes could blunt the uptake and economic impact. For instance, the job subsidy scheme is only focused on formal sector employees earning less than Rs 15,000 per month. The income tax relief for home buyers is only limited to the purchases of houses costing less than Rs 2 crore. Much of the real estate sector stress is in houses above this threshold.
The overall price tag in these schemes under Stimulus 3.0 is Rs 2.7 trillion or 1.4 per cent of the GDP. But the incremental cash outgo in the current year is likely to be much smaller, given (1) some schemes have a multi-year focus (e.g. the PLI scheme), (2) some may face implementation delays (e.g. the additional capex outlays), (3) some may see a spill-over of expenditure into the next year (e.g. the fertilizer subsidy), and (4) some may be funded by repurposing of expenditure. Recall that in the first half of the year, fiscal expenditure was seen contracting 1 per cent YoY versus budget estimate of a 13.2 per cent expansion.
The fiscal support package so far has had a cash outgo of 1.7 per cent of GDP. With last week’s announcement, it is likely to go up to about 2 per cent of GDP.
The central government’s fiscal deficit is expected to widen to 8.2 per cent of GDP in FY21 versus 3.5 per cent budgeted, led more by a shortfall in tax revenues than a rise in expenditure. The risk to our forecast is that the deficit comes in a shade narrower, given weak expenditure trends (-1 per cent YTD).
While the fiscal stimulus has been small, monetary policy has been extremely accommodative. There has been a meaningful pick-up in activity over the last few weeks. Some of this could be reflective of festival-led and pent-up demand. Reforms are needed for this uptick to sustain. The focus should extend from announcement of reforms to their effective implementation. Also, nurturing an environment of policy certainty with regard to taxes, foreign direct investment rules and payment of dues to small businesses can have a meaningful impact on kick starting the private capital spending cycle.
(The author is Chief Investment Officer, Kotak Mahindra Life Insurance Company Limited. Views are own)