The exact details of the Rs 20 lakh crore economic package hinted at by Prime Minister Narendra Modi are not known yet, but a plain reading of the number hints at more government borrowings and possible debt monetisation (printing of currency notes) in the near future.
Last week, the government raised the borrowing target by over 50 per cent from Rs 7.8 lakh crore to Rs 12 lakh crore. This borrowing won't be sufficient to accommodate a large size fiscal stimulus.
But it is not right to say India's fiscal stimulus is 10 per cent of its GDP. That's because the RBI's infusion of liquidity into the system is not an economic stimulus. Also, the liquidity hasn't translated into credit or gone to sectors that needed the most.
The Rs 20 lakh crore package amounts over 65 per cent of the government's 2020/21 budget of Rs 30.42 lakh crore.
The numbers do not really add up. The PM has included the earlier two packages in the Rs 20 lakh crore. Finance Minister Nirmala Sitharaman's relief package of Rs 1.74 lakh crore had items that had already budgeted in the Union Budget 2020/21. This includes the money for MGNREGA and PM Kisan. The actual amount over and above the budget was estimated to be Rs 1 lakh crore out of the Rs 1.74 lakh announced by the FM. Essentially, the actual stimulus was Rs 1 lakh crore only.
Similarly, RBI's Rs 4.74 lakh crore package was more of liquidity infusion and didn't actually translate into helping sectors which needed the money most. Banks didn't disburse money based on liquidity. Much of the RBI liquidity measures saw money flowing back to the RBI. The money remained with banks and the RBI.
If you remove Rs 6.54 lakh crore -the total of two packages -the economic package comes out to around Rs 14 lakh crore. The PM hinted that the package includes liquidity measures. Clearly, he is hinting at more measures from the RBI side which is not stimulus. Let's assume a Rs 2 lakh crore liquidity infusion by RBI is added to the package, the remaining economic package amount comes out to be Rs 12 lakh crore.
Similarly, the remaining amount of the package could include some guarantee, which again is contingent. They could incentivise banks to lend few lakh crore, which will not be a hit on budget numbers.
Even if we assume additional money of Rs 10 lakh crore, the current borrowings won't be enough to accommodate it. The government will need additional money from the market. Will the market have the appetite to buy such large quantities of government paper?
Looks like the government would go in for debt monetisation, sooner than later.