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New second wave stimulus package: an analysis of the government’s post

You must have heard the phrase ‘better late than never’ when an anticipated thing advances, even though after a lot of wait and assertions. Well, the second stimulus package released by the finance minister of the country rang exactly like that to the people’s ears.

While we may get a sigh of relief just at the news of it, the current condition of the economy calls for an in-depth analysis of what the package entails and would it actually be able to stimulate the economy, which, apparently, is its purpose. Well, let’s find out.

The overview given of the said package revolves around the lines of it increasing the provision and extension of loan guarantees, concessional credit availability, and improvement of healthcare infrastructures.

At the core of it, all of these are important touchpoints for the economy because a healthy and sustainable recovery would require these as its prerequisites, but a stimulus, by definition, has to be the parameters that would spur growth in the short run. Proceeding with this in mind, let’s analyze the key provisions and what their likely impact would be.

The fiscal scope of the package has been kept limited, as described by the Finance Minister in her explanatory session. This may come in contrast to economists’ expectations, for they have witnessed broken monetary chains in the system. Nonetheless, the mentioned financial beneficiary parameters include a reiteration of two schemes-

Providing food grains to the poor till November 2021. The second wave of the pandemic has had a terrible impact on the lower income and rural sections of the society, not only driving them out of any source of income but also hindering future prospects. A ration scheme, at such a critical time, is no longer a want but a need, and given the track record during the first pandemic wave, it may prove to be one of the successful outliers from the bunch.

Another step includes higher fertilizer subsidies, to help save rural India from the devastating impact the second wave has had on them. Note that during the first wave, rural India turned out to be the economic savior due to some stimulating demand-side policies like advanced installment payments, minimum employment guarantee schemes, and grain purchase at the minimum support price.

However, this time around, when the pandemic wreaked havoc on the rural side of the country, its emergence as the economic savior is a little unlikely, much more difficult in the absence of these above-mentioned stimulators.

The financial expenditure, thus, has been capped at Re 6,28,993 crore.

 

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stimulus

 

As for these financial aid parameters, there’s a lot of sects that need financial resources for the eventual purpose of stimulation. Much like the first stimulus package that was in stark contrast to what other countries were diving into in terms of fiscal support, the fiscal support this time around has also been kept limited.

Well, we all saw the impact of the first one, right?

Nonetheless, the country’s economy to actually experience the impact of stimulus in the short run would direct transfer benefits to the informal sector, unemployment insurance and benefits to the millions that lost their livelihoods, health insurance provision to limit the inclination towards savings in the current period, and others could essentially perform two key functions required for economic growth-

 

Boosting discretionary consumption in the present period
and reducing income inequality.

 

Stimulus Package

While the proponents of production-led economic recovery may dismiss the impact of consumption on growth, India’s private consumption-based economic growth tends to present a contrasting picture.

India’s fiscal resources are understandably limited and the debt to GDP ratio quite high, however, the need of the hour cannot be ignored even if there are holes in one’s pockets. These were some of the systemic key points on the financial cap proposition, let’s take a look at the other provisions of the stimulus package.

A provision of Re 1.5 lakh crore has been made to the Emergency Credit Line Guarantee scheme, which claims to provide full coverage to banks and NBFCs in an attempt to allow them to stimulate credit to the medium scale enterprises unable to meet their working capital requirements in the light of the pandemic’s wrath.

When the second wave was at its peak, a discussion on loan moratorium took the momentum and the reserve bank maintained that it would be rather difficult for banks to continue with the scheme, given their financial position.

The twin balance sheet problem of the country, which has now converted into a four balance sheet one, posing the ultimate threat to the sector. As a result, a scheme like this helps ensure the lending sector and eventually, the borrowers are all not severely impacted.

For small enterprises, a new provision has been made for Re 7500 crore to the loan guarantee scheme, which entails the availability of up to Re 1.25 lakh to small enterprise owners. The direction of this transaction is pointed towards the micro-finance institutions.

Another significant contribution has been made of Re 23,220 crore in the health infrastructure sector, with an intent of improving the current status quo of the current health structure and for increasing ICU beds, effacing the oxygen supply, and stimulating the doctor to patient ratio via the hiring of final year students and interns.

With the likelihood of a third wave circumscribing the future prospects of the country, this was an essential step. Even though the adequacy of the allocation is yet to be commented upon by experts, we can expect some great outcomes coming from this one. These effects would not only be seen on mitigating the catastrophe awaiting us in the form of the third wave but would also aid in boosting up consumption for it helps increase consumer confidence.

Support scheme for the export sector has also been undertaken in the said relief package, with its duration extending over the span of the next five years. Some other ones like new varieties of seeds, extensions of broadways for gram panchayat, and other conversations were also struck during the release of the package.

This basically sums up the primary gist of the released stimulus packages, with some areas that require work mentioned and the probable impact assessed. However, one key thing to note here is that other provisions were already a part of the budget released for the current financial year and thus, their costs have been accounted for already. And while these large numbers may present a varied picture, most of this is on the lines of loan and credit guarantee, meaning that there would not be much present outflow of money, implying a lesser impact on the fiscal deficit, and likely the economy as well.

Supplementing the package with another round of stimulus later in the year is the economists suggested ideal way for the government to take. However, how real its possibility would get is yet to be seen. Nonetheless, the scope assessment of this stimulus package indeed helps us in figuring out what the way forward for the Indian economy would look like, and we’ll be well observing on its journey, as and when things come.

Edited by Aishwarya Ingle 

Simerleen Kaur

Talk to me about economics, trade, and all things India.

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