As India announced the extension until 31st May 2020 of its COVID-19 lockdown known as Lockdown 4.0, Prime minister Modi unveiled a stimulus package of INR 20tn (USD 263bn) which roughly translated into 10% of the country’s GDP. The Prime minister’s announcement was followed with badly needed explanations from India’s Finance minister who explained that the total package was eventually amounting to INR 21tn (USD 276bn). What is in the package?

The stimulus comprised some direct cash transfers, free food grains for the poor, support packages for small businesses and for certain sectors, low-interest loans for struggling businesses and a wave of reforms aimed at creating a ‘self-reliant India’.

Unfortunately while the headline number is large, the real fiscal stimulus portion amounted to only INR 2.4tn (USD 31bn). 70% or INR 1.7tn (USD 22bn) of this amount had actually been announced much earlier, on 27th March 2020 precisely, under the Pradhan Mantri Garib Kalyan Package (PMGKP) which was direct cash transfers and food security measures specially tailored for millions of poor people hit by the initial 21-day nationwide lockdown. This already-announced PMGKP measure was clubbed together with another measure that had been announced previously, a Reserve Bank of India (RBI) liquidity injection totalling INR 8tn (USD 105bn). Excluding what had already been announced, the real “new” fiscal stimulus measures announced last week amounted to less than INR 0.7tn (USD 9bn). On that basis the rise in fiscal deficit seems minimal, which will ease market concerns about how the government will fund the stimulus package since there is almost nothing to finance.

Given its tiny real amount, the impact of this stimulus package on the economy appears to be numb. Excluding the earlier announced measures and the RBI liquidity measures, the real stimulus was divided into five tranches totalling INR 11tn (USD 145bn), or slightly more than 5% of GDP:

• The first tranche of the stimulus consists in making available collateral-free loans to Micro Small and Medium Enterprises (INR 3.7tn/ USD 49bn), in a liquidity injection to the power distribution sector (INR 0.9tn/ USD 12bn)  and special liquidity schemes and credit guarantees for Non-Banking Financial Companies (INR 0.75tn/ USD 10bn) that are at the epicenter of the pre-COVID financial crisis that rocked India. Banks will be responsible for these loans.
• The second tranche of INR 3.1tn (USD 41bn) largely focused on farmers getting concessional credit and refinance support amounting to INR 2.3tn (USD 30bn). Another INR 0.7tn (USD 9bn) grouped under tranche 2 is a mere extension of an existing interest rate subvention scheme for middle income earners housing loans that got extended by one more year from March 2020 to March 2021. 
• The third tranche amounted to INR 1.5tn (USD 20bn) which mainly comprised of an Agriculture infrastructure fund of INR 1tn (USD 13bn) and animal husbandry infrastructure fund of INR 0.15tn (USD 2bn).
• The fourth and fifth tranches of announcements included a viability gap funding of INR 0.08tn (USD 1bn) and an additional rural employment allocation of INR 0.4tn (USD 5bn).

Some structural announcements like raising the Foreign Direct Investment (FDI) limit in defense from 49% to 74%, allowing a higher private sector participation in the privatisation of  Public sector enterprises in certain non-strategic sectors, announcing the privatization of power sector distribution companies in Union Territories, easing the restrictions on the utilization of Indian air space, or raising the States borrowing limit from 3% of GDP to 5% of GDP were also made. 

While these structural reforms are good, they will certainly not stimulate demand in the near term or prevent the economy from seeing its GDP collapse. The fiscal stimulus that consists in previously announced measures and in these minimalist new ones is nowhere near what would be considered as the bare minimum to keep the economy recover in a post-COVID environment.

The lukewarm response of the stock market following the announcement aptly reflected the mood of investors who were not impressed by New Delhi’s stimulus package, to say the least.

While we believe some of the liquidity support measures targeted towards Non-Banking Financial Companies are positive for the sector, we remain very sceptical as to the impact this so-called “stimulation package” will have on the Indian economy in the near term.