Following the announcement of relief and stimulus package, the debate began over its various aspects. This article assesses the various aspects of the package and draws comparison with the package announced by the other countries. So, how does India fare compared with other countries?

Fiscal component of  stimulus package

• According to the IMF-PT (policy tracker), the fiscal component of the Indian package is estimated to be at least 3.5 per cent of GDP as expenditure for poor households, migrant workers and agriculture.
• There is an additional 0.5 per cent of GDP for states to spend unconditionally, bringing the fiscal package excluding loans to businesses to at least 4 per cent of GDP.
• The support for businesses (MSMEs) is estimated to be 2.7 per cent of GDP.
• Of this, at least 2 per cent of GDP is in the form of 100 per cent credit guarantees and equity infusion.

Comparison with major emerging economies

• Among major developing economies, only Brazil -8 per cent of GDP– and Peru -7 per cent of GDP– have a fiscal stimulus higher than the 5 per cent level for India.
• The Brazil estimate includes about 3 per cent of GDP as working capital loans to businesses and households.
• The fiscal support level for some important emerging economies is — China 2.5 per cent of GDP and Indonesia 3.5 per cent.

Why it is difficult to segregate the stimulus package?

• While comparing the fiscal stimulus packages across countries, it is important to understand that such packages are in the nature of additional spending and tax reliefs.
• Which can work directly through aggregate demand or indirectly by mitigating risk and enhancing access to fund.
• Access to fund is ensured in the nature of credit guarantees to financial institutions and non-financial enterprises
• A large number of fiscal stimulus packages announced by different countries contain credit guarantees to financial institutions, SMEs, and agriculture.
• Hence, it is difficult to segregate fiscal stimulus into its pure and impure components.
• Most economists, and international organisations, recognise that fiscal stimulus consists of both the pure and impure.
• And includes three broad items — a direct “above-the-line” component, a “below-the-line” component and guarantees of various forms primarily credit.
• The choice of using only one component of the fiscal stimulus is selective and highly inappropriate.

India as a positive fiscal stimulus outlier

• To put the packages into perspective, the average of all fiscal measures in the G24 developing economies is equal to 3.6 per cent.
• No matter how the calculation is done, India is a positive fiscal stimulus outlier; by IMF-PT calculations.
• The stimulus is close to the largest among major emerging market economies.

So, how much rich countries are spending?

• The rich nations are spending more — they can afford to. Japan announced what may be the upper limit to the expansion — 21.1 per cent of GDP.
• However, this does include large elements of loans and credit guarantees.
• Through a combination of several fiscal measures (tax deferrals, credit guarantees, etc.) the US has pledged close to 13 per cent of GDP.
• The European Union, on average, has pledged 4 per cent of GDP.
• The average for advanced countries is around 6 per cent of GDP.

Significance of monetary policy change made by RBI

• The monetary policy change in India is quite significant.
• The change paves the way for internationally competitive monetary policy.
•  That is, real interest rates comparable to those prevalent in competitor economies.
• The repo rate now stands at 4 per cent, with inflation well contained.
• This is substantially a much different, and much-improved RBI response than that what occurred in 2008-09.
• At that time, as a monetary counter to the financial crisis, the RBI reduced the repo rate by 425 basis points to 4.75 per cent.
• This was done over seven months and the prevailing CPI inflation rate was 10 per cent.

Economic reforms as a part of stimulus package

• India has announced several economic reforms as a part of the stimulus package.
• These are long-awaited — freeing up of the labour market, allowing farmers to sell their produce and land to who they choose, removal of archaic laws like the Essential Commodities Act, with the promise of more to come.
• This is not an empty promise — the Centre will advance another 1.5 per cent of GDP to states to expand spending.
• This advance will be conditional on them for undertaking long-pending reforms.
• The Indian fiscal package is reformist, well-disciplined and provides focused support; and if needed, there is still room for additional measures.

Conclusion

The Indian fiscal package is reformist, well-disciplined and provides focused support; and if needed, there is still room for additional measures. We should use the crisis to re-orient India towards its long-awaited destiny.

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