The Fiction of a Stimulus Package of Rs. 20 Lakh Crores

May 16, 2020
Prof Surajit Mazumdar

The economic stimulus package initially announced by the Prime Minister, with more details being spelt out by the Finance Minister over a series of press briefings, is claimed to have a size of nearly Rs. 20 lakh crores or 10 percent of the country’s GDP.

However, the stimulus package does not involve any significant increase in expenditure by the Central Government. The estimated Central Government expenditure for the full year 2020-21 was placed at Rs. 30.4 lakh crores in the Union Budget presented in Parliament before the Covid-19 effects were felt. In order to increase expenditures beyond the budgeted level, the Government would have to find more resources through additional taxation measures or borrowing. The only announcement (8 May) relating to resource mobilization in the context of the Covid-19 pandemic that has been made is the revision in the estimated gross market borrowing of the Central Government in 2020-21 – which has been pushed up from Rs. 7.8 lakh crores to Rs, 12 lakh crores. This means an increase of Rs. 4.2 lakh crores in the gross market borrowing.

The borrowing requirement of the government is determined by the difference between its expenditures and its revenue receipts. The Union Budget had also made an estimate of revenue receipts for 2020-21 which cannot now be met because of the adverse impact of the lockdown and other measures on the tax and non-tax revenues of both Central and State Governments. This shortfall in revenue itself increases the borrowing requirements of the Government even if the expenditure is maintained at the budgeted level of Rs. 30.4 lakh crores. Indeed, much of the additional borrowing of Rs. 4.2 lakh crores would be needed to neutralize the revenue losses alone, which are going to be large.

It is clear therefore that the Central Government has no intention of increasing its spending significantly – not even a small fraction of the Rs. 20 lakhs crores package is therefore going to take the form of spending. Indeed, the essence of most of the measures announced so far is revealed in the statement of the Finance Minister that the package leans towards ‘empowering’ rather than entitlement. They seek to encourage and facilitate individuals and businesses who have suffered revenue and income losses due to the large scale shutting down of economic activity to increase their borrowing (from banks and other institutions), at a time when their ability to repay even their existing debt has been adversely hit. There is hardly any measure which compensates workers, wage and self-employed, or farmers for the loss of income they have suffered. Instead there are measures like the reduction in the statutory contribution to Provident Fund, which in effect amounts to a wage cut!

The unwillingness to expand its expenditures and to compensate workers and farmers adequately for their loss of income will in turn mean that the demand situation in the economy will be more adverse – relative to even the bleak situation existing even before the pandemic. This would make it difficult for economic activities to revive - further limiting the ability of not only workers and farmers but also businesses from reviving their earnings and incomes. Such a policy of Increasing debt while constraining incomes is a recipe for disaster – either the loans being encouraged will not be taken or given, or they would soon turn into non-performing assets. The irony is that this will also mean that the tax revenues will end up being less than they could have been – one might say therefore that the Government will end up doing additional borrowing not to increase its spending but because it is unwilling to spend. This problem would be compounded by the restraints on expenditures that will also be imposed on the state governments by the loss of revenues they will also face – in their own taxes as well as in their share of central taxes. 10 per cent of GDP may not be the size of the stimulus but the magnitude of the loss of GDP that might be its result.