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The Centre’s ₹20-lakh-crore package does not do much to boost consumption in the short term, and that could act as a drag on growth, according to State Bank of India’s research report, ‘Ecowrap’.
The report, put together by the bank’s Economic Research Department, said it is less hopeful of recovery in the current fiscal, and its GDP projection for FY21 could now have a downward bias from the current stress estimate of -4.7 per cent.
Of the total ₹20-lakh-crore package that has been announced by the government five tranches, measures amounting to 4 per cent of GDP have been undertaken by the RBI.
“The direct fiscal impact of the reforms, however, comes to around ₹2-lakh crore (1 per cent of GDP),” said Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI. “The measures announced have been a mix of short-term and long-term, with focus on building the capabilities for the small players in the economy as well as paving the way for structural changes in certain sectors.”
Revenue slippage
The report estimates the revenue loss for the Centre, after taking into account gains from an excise duty hike and dearness allowance freeze, at around ₹6.53-lakh crore (3.27 per cent of GDP). However, the government has announced additional borrowing of ₹4.20-lakh crore for FY21.
“This would imply net uncovered revenue slippage of ₹2.33-lakh crore (1.17 per cent of GDP). Further, the amount of stimulus has a fiscal impact of ₹2.03-lakh crore (1.01 per cent of GDP).
“Thus, a total of ₹4.36-lakh crore is still the uncovered loss of the Centre even after the additional borrowing by the Centre. Interestingly, this is nearly equivalent to Budgeted Capital Expenditure of the Centre,” said Ghosh.
In view of the unprecedented situation due to Covid-19, the Centre has decided to accede to the request of the States and increase their borrowing limits from 3 per cent to 5 per cent for FY21. However, the borrowing of only 0.5 per cent of the GSDP is unconditional and the rest 1.5 per cent depends on their performance on four criteria.
“Accounting for extra revenue for States and Covid expenditure, the States will lose around ₹6.4-lakh crore, of which, only ₹3.2-lakh crore can be compensated by borrowing, as States will not be able to borrow ₹4.28-lakh crore because of conditional ties attached. Thus, a total of ₹3.2-lakh crore is still the uncovered loss of the States even after the additional borrowing. We expect States to at least strip the estimated Budgeted Capital Expenditure for FY21 from ₹8.8-lakh crore by 50 per cent, if not more,” said the report.
Ghosh expects the Centre and RBI to take a considered call on increasing the fiscal deficit of States by using the exceptional clause.
Sector-specific reforms
The report said several sectors, such as coal, power, aviation, social infrastructure, space and atomic energy, have been singled out for reforms that could have significant long-term potential. “The agricultural reforms deserve special mention. For example, the Centre also proposes to enact a Central law to let farmers transport their produce across State borders and sell to whoever they want, not just APMC (Agricultural Produce Marketing Committee) licensees.
“If competitive supply chains emerge, this could shorten the farm-to-fork path, as it is called, and assure farmers a larger share of the consumer spend on food,” it added.
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