Stimulus 3.0 signals a cautious approach to economic recovery

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Finance Minister announced ‘Atmamirbhar 3.0’ focusing on 12 areas on 12th November’20. With the inflation rate above 7 percent, there is limitation on the RBI to announce more monetary easing measures. Now, it is the Government’s turn to announce measures to uplift the economy from the current crisis. Even before the pandemic, Indian economy was facing a slowdown with GDP growth rate at 4.18 percent for FY20, lowest in the last 10 years. The pandemic pushed the country to a complete lockdown for nearly three months, resulting in a negative GDP growth rate of 23.9 percent in Q1FY21. As per the recent estimates of RBI, GDP growth rate for Q2FY21 would be at -8.6 percent, pushing the economy to a recessionary phase. In such a scenario, strong measures are needed to guide the economy to the recovery path.

In the third stimulus package, Finance Minister announced measures to boost employment     generation in the formal sector. A new scheme ‘Atmanirbhar Bharat Rozgar Yojana’ was announced. Under this new scheme, new employees under the Employees’ Provident Fund Organisation (EPFO) registered organisations will enjoy benefits, including subsidy support by way of EPF contributions. The employment generation in any economy will be in response to how well the economy is performing. If there is an increasing demand for its products or services, companies will add more people to the workforce. In the current scenario, with weak economic outlook, government’s push to boost employment in the formal sector will only have a limited success. The cost borne by the employer in hiring people is likely to outweigh the benefits.

The extension of Emergency Credit Line Guarantee Scheme (ECLGS) till March 21, 2021 is a welcome step. As per the recommendation of Kamath Committee, 26 stressed sectors have been identified that would be eligible for collateral free and 100 percent guaranteed loans. This would benefit resource starved sectors in the economy. However, the risk averse nature of the banks could act as an impediment. The banking sector is also in stress due to the fear of rising NPAs. As per the estimates of RBI, NPAs of banks may rise to 12.5 percent by March 2021.

The extension of Production Linked Incentive (PLI) scheme to 10 more key sectors can have a positive impact in attracting foreign investment as well as a boost to the domestic players. In order to boost rural employment, Finance Minister has   announced an additional Rs 10,000 crore towards Prime Minister Garib Kalyan Yojana. Increased allocation towards schemes such as Prime       Minister Awaas Yojana and equity infusion in National Investment and Infrastructure Fund (NIIF) could generate multiplier effect on the economy. On the ease of doing business front, performance security on contracts was reduced to 3 percent from 5 to 10 percent. Relaxation of Earnest Money Deposit (EMD) is also on big step towards improving the business climate in the country.

Government is moving very cautiously in its approach towards economy recovery. The government is mindful of its fiscal deficit figures, and the schemes are designed in such a way to limit the burden on exchequer. Rising fiscal deficit can bring in other unintended consequences on the economy.

Article first published in Economic Times.

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