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Fiscal cost of new stimulus measures likely to be ~0.3% of GDP

On 28 Jun 2021, the Finance Minister announced a fresh round of stimulus measures to support the economy after the second wave of Covid-19. The measures consist of three pillars: ‘economic relief’, ‘health’ and ‘impetus to growth and employment’. While the announced size of the package was ~Rs 6.3trn (or ~2.8% of nominal GDP in FY22), the actual fiscal outgo in FY22 is likely to be ~Rs 684bn (~0.3% of GDP).

Our analysis of the measures shows that ‘economic relief’, ‘health’, and ‘impetus to growth and employment’ pillars account for 60%, 2% and 38% of the total announcements. However, in terms of fiscal outgo, they account for 0%, 22% and 78% respectively.

* FM announces new round of stimulus: Finance Minister Nirmala Sitharaman announced fresh stimulus measures on 28 Jun 2021 to combat the economic impact of the second wave of Covid-19. The announced size of the stimulus was Rs 6.3trn or ~2.8% of the estimated nominal GDP for FY22. The package was based on three pillars: economic relief from the pandemic, support to the health sector and impetus for growth and employment.

* Announced size of the package ~Rs 6.3trn; actual fiscal outgo in FY22 estimated at Rs 684bn: While the announced size of the package was ~Rs 6.3trn, the actual fiscal outgo in FY22 is likely to be much lower. This is because of three reasons: (i) some of the measures included in the package were announced earlier (e.g. extension of free food grains till Nov 2021, additional allocation for fertilizer subsidy) (ii) like the earlier stimulus packages, this package has also relied heavily on government-guaranteed loans which don’t have any upfront fiscal cost and (iii) some of the measures are spread over five years, splitting the fiscal costs over a longer timeframe.

* ‘Economic Relief’ pillar mostly based on guarantees; actual fiscal outgo meagre Rs 1bn: The ‘economic relief’ pillar constituted measures to (i) support sectors ravaged by the pandemic (such as health infrastructure, microfinance institutions, travel and tourism sector), (ii) incentivise new employment generation (by subsidising PF contribution), (iii) continuation of free food grain distribution to the poor, and (iv) additional allocation for fertilizer subsidy.

The total announced size of this pillar is Rs 3.76trn or almost 60% of the total package. However, out of these measures, the last two viz. free food grains to the poor till Nov 2021 and additional allocation of fertiliser subsidy were announced earlier in the months leading up to yesterday’s package. Hence, excluding these old measures, the quantum of fresh measures comes to Rs 2.67trn. Since this package mostly consists of guaranteed loans (which do not result in immediate fiscal outgo), its actual impact on the fisc in FY22 is estimated at just Rs 1bn.

* ‘Health’ pillar aims to augment pediatric healthcare infrastructure; fiscal outgo Rs 150bn: The second pillar, ‘health’, had just one measures aimed at augmenting pediatric healthcare infrastructure, availability of ICU beds, oxygen supply and other critical healthcare needs. While the total outgo under this pillar is pegged at Rs 232bn, centre’s share is estimated at Rs 150bn.

* ‘Impetus for growth and employment’ pillar most significant in terms of stimulus; outgo seen at Rs 533bn: The third pillar, ‘Impetus for growth and employment’, is the most important pillar in terms of stimulus. It consists of financial assistance to DISCOMS, measures to boost to exports, and investment in broadband. In terms of announced size, this pillar accounts for Rs 2.37trn or 38% of the package. However, in terms of estimated fiscal outgo, it is the most significant pillar accounting for Rs 533bn or 78% of the estimated fiscal cost of this package.

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