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Calibrated Economic Package (Atmanirbhar Bharat 3.0) – Part 2

  • IASbaba
  • November 16, 2020
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ECONOMY/ GOVERNANCE

Topic: General Studies 2, 3:

  • Government policies and interventions for development in various sectors and issues arising out of their design and implementation
  • Indian economy and mobilization of resources

Calibrated Economic Package (Atmanirbhar Bharat 3.0) – Part 2

Click here for Part 1 of the article

Merits of the Package

  • Objective of Package: The measures are designed to maximise the economic impact of fiscal spending, like the various credit guarantee programmes, where the flows triggered by the guarantee are several times the potential fiscal cost
  • Spending is calibrated, as seen in the continued expansion of the MGNREGA budget, which received its second extension, given that three-fourths of the earlier expanded budget had been used up by October.
  • Issue of Hunger tackled: The free grains programme was not extended beyond November, as the economy is now more or less fully open, and the risk of abject hunger is lower.
  • Success of PLI Scheme: The expansion of the Production-Linked Incentives (PLI) scheme to 10 new sectors is a result of the success thus far of the PLI scheme for handsets. The PLI scheme is as much about self-reliance or cutting down imports, as it is about offering cash incentives to boost domestic production, which is expected to create employment.
  • Stresses Sectors recognised: The package expands the supply of loanable funds through enlargement of credit guarantee scheme to support stressed sectors 
  • Boost to Real Estate Sector: Tax incentives for home buyers could potentially unleash a price discovery in the real estate market. The real estate sector which has a significant multiplier impact on the economy has high employment generation capabilities.
  • Boosting Employment: By offering to foot the bill for provident fund contributions, it has nudged companies, big and small, to hire. 
  • Urban Poor and Demand for Urban NREGA: Unsure of whether an urban MGNREGA could be implemented cleanly, and even if so, what its impact would be on rural-urban migration, the Indian government has chosen to target this problem indirectly, through a sharp increase in the budget for urban affordable housing.

Concerns

  • Banks not enthusiastic to lend: The originally envisaged credit guarantee scheme with a target disbursement of ₹3 trillion has seen just about half of the amount being lent out by banks. This shows that despite low risk, banks are uncomfortable to lend.
  • Future Risk: Forcing banks to lend to companies where assessing risk has become a challenge due to the pandemic puts banks at a bigger risk, credit guarantee or not.
  • Impacts can be felt in medium term: The Rs 1,45,980 crore expenditure in the form of production-linked incentives (PLIs) to 10 new sectors will be over five years, and likely kick in only next financial year

Way Forward

  • First, a recalibration of borrowing needs this year, which could provide some relief to the bond markets. 
  • Second, clearing overdue payments, particularly by state governments — the Centre’s decision to clear fertiliser arrears is a step in right direction. This by itself could provide a stimulus to the economy. 
  • Third, and most important, would be for state and central governments to build in a stimulus in next year’s budget.

Conclusion

  • The package reinforces the ‘fiscal conservatism’ ideology of the government — rather than large cash transfers.
  • The growth philosophy centres around creating an ecosystem that aids domestic demand, incentivises companies to generate jobs and boost production, and simultaneously extends benefits to those in severe distress, be it firms or individuals

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