Atma Nirbhar Bharat 3.0: What’s Inside the Latest Government Stimulus Package?

With the festive spirit running high, the Government has announced a fresh set of financial stimuli tilted again largely towards spurring demand rather than direct cash injection.

The Finance Minister on Thursday unveiled a ₹1.2trn ($16bn) stimulus package as part of the Atma Nirbhar Bharat 3.0 initiative with measures in production, banking, agriculture, healthcare and a host of other allied sectors among other timing extensions to already announced measures in the 1.0 and 2.0 avatars.

Let’s dive right into them!

Headline Numbers

Atma Nirbhar Bharat 3.0 is the third tranche of Government stimulus in the current financial year that is pegged at ₹2.65trn ($35.5bn).

This includes ₹1.45trn ($19.4bn) in PLI announced on Wednesday and ₹1.2trn on Thursday taking the total value in headline terms of the Government stimulus this year to ₹29,87,641cr ($400bn) (amounting to 15% of GDP). FM said that the Government’s contribution to the stimulus was only 9% while the balance was contributed by the RBI.

If we look at the fiscal overspend however, that comes up to around ₹1,18,200cr ($15.8bn) (extra expenditure this year). This is the combined cost of the phased packages that were unveiled by the Government since March 27th and equals 0.6% of the GDP.

Confusing “liquidity” with “outgo” is obviously convenient, but that needs a separate discussion all together!

Performance Linked Incentives (PLIs) and fertiliser subsidies form the lion’s share of this package. While that takes care of manufacturing (₹1,45,980cr), there are meaningful allocations in the agricultural sector (₹65,000cr ($8.7bn)), ₹10,200cr ($1.3bn) allocated for industrial infrastructure and other measures to boost the economy.

Major Focus Areas

The PLI scheme is now set to cover 10 manufacturing sectors with a combined cost of ₹1,45,980cr (20bn). This is in the form of tax credits spanning over the next five years.

Additionally, the ECLG Scheme is now extended (Now ECLGS 2.0) till March 31st 2021 to enable guaranteed and collateral-free loans at capped interest to MSMEs, business enterprises and individuals (business loans + MUDRA borrowers).

Both the schemes combined have generated a “take-on-China” hyperbole in the larger narrative of turning India into a manufacturing hub.

In a bid to create jobs, a subsidy (24% of EPFO contributions) was announced for employers who provide new employment on or after October 1st 2020. This will cost the Government an additional ₹6,000cr ($804m) over the next two years.

The residential real estate sector obtained a sweetened pie by having the permissible tax-exempt gap between circle rate and agreement value widened from 10% to 20% for the sale of residential units costing up to ₹2cr ($268,000). (applicable till June 30th 2021). This is designed to drive an uptick in the purchase of residential property and as such helps both homebuyers’ and residential builders. Sticking to the theme of housing, an additional ₹18,000cr ($2.4bn) of extra budgetary resources are to be deployed towards Prime Minister Awaas Yojana — Urban (PMAY-U).

(FYI: Circle rate is the government-determined value of property while agreement value is the one negotiated between seller and buyer.)

There is also a ₹6,000cr equity infusion into the National Investment and Infrastructure Fund’s Debt Platform. The platform as such is envisaged to deploy about ₹1,10,000cr ($14.7bn) into infra financing.

Finally, an additional ₹3,000cr ($402m) credit line to EXIM bank was announced, aimed to nudge exports.

What Are We Looking At?

The extension of PLI schemes which have presented as the cherriest items in this package are yet to ripen. The tax benefits offered under this scheme are for projects that don’t exist yet and hence the scheme is unexpected to activate this year due to lack of initial investments and incremental sales.

Same is true for fertiliser subsidies as data up to September shows that out of the ₹71,345cr ($9.5bn) allocated for the sector this year, 78% has already been spent (increase in excess spending is around ₹5,000cr-6,000cr). It is estimated that the prevailing sowing season will last for only four more weeks which will effectively cap expenditure and leave the extra ₹65,000cr ($8.7bn) redundant.

Fiscal deficit is projected to widen by 0.35–0.5% of the GDP as opposed to 9% projected earlier.

While the ₹18,000cr ($2.4bn) via PM Awas Yojana (PMAY) might lead to construction of 12 lakh houses, its impact on job creation and construction activities might be more interesting to gauge.

Performance security on government contracts has reduced to 3% from 5–10% earlier. This indicates replacement of EMDs on tenders by a Bid Security Declaration. This is a special relief for contractors who can now operate with reduced locked-in capital and lowered cost of bank guarantee. Good news, as far as ease of doing business is concerned with another theme with a “take-on-China” narrative.

What to Take Away

The idea of “fiscal conservatism” that was promoted by the Government emphasises on growth philosophy revolving around creating a holistic ecosystem of boosting domestic demand and incentivising production, rather than cash direct cash transfers.

Although that is what is representative of this stimulus package, one can’t help but overlook the extra fiscal duress it creates for the economy. RBI’s report on “State of the Economy” predicted a positive growth next fiscal while acknowledging relentless inflation pressures, reduced global growth and second/third onslaughts of the virus.

One can only hope that the current stimulus helps override certain bumps in the economy to pull the growth machines ahead.

(Originally published November 14th 2020 in transfin.in)