PM says he is unveiling fiscal support cum stimulus of Rs. 20 lakh crore or 10% of GDP. This includes RBI liquidity package -already announced- of about Rs.4.5 lakh crore. The details of fresh fiscal package to be unveiled by finance minister tomorow. At long last!
Net of RBI liquidity package already announced the fiscal package could be 7 to 8% of GDP. PM hints there could be more income transfer to vulnerable sections & additional financial support to important segments of supply chain of business & economy.
It remains to be seen how the fiscal package of additional 7 to 8 % of GDP will be funded. Will RBI print more currency or will other mechanisms be unveiled under which gross borrowings will be increased without monetising deficits.
I suspect a substantial part of the package will be in the form of govt guarantee to banks for lending to MSMEs etc which may not add to headline fiscal deficit.
One is not sure exactly how much fresh funding of the economy the government will do via borrowings because a good part of the package could also be in the form of tax breaks for new investments. Tax forgone can’t be so effective in an extreme slump situation.
The Rs.20 lakh crore (10% of GDP) package appears huge but the devil may be in details. The key is how much immediate cash is being dispensed to various economic constituents. In an unprecedented slump what matters is cash in hand. Just watch out for that! Rest may be noise.
