There is no sure way of knowing how much the government will spend at the end of this financial year, but most calculations suggest that far from the promised 10% of GDP, the actual government expenditure in the Atmanirbhar package is just 1%.

Dear Readers,

On the face of it, as Prime Minister Narendra Modi said in his address to the nation on May 12, the Atmanirbhar Bharat Abhiyan economic package is worth Rs 20 lakh crore, which is around 10% of India’s GDP in the 2019-20 financial year.

Yet, many have openly questioned the ability of this economic package to either provide adequate immediate relief to the most distressed sections of the economy, or indeed stem the rapid decline in India’s Gross Domestic Product (GDP) growth.

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Let me attempt to explain why that is happening and why this package is seen as inadequate.

With a nationwide lockdown for the better part of April and May, the total quantum of economic activity in the country — measured by the monetary value of all goods and services produced — has sharply curtailed.

Given an uncertain future for the rest of the year, most observers estimate that the Indian economy will contract. That is, it will produce less in 2020-21 than it did in 2019-20. This means the Gross Value Added (GVA is a proxy for the income earned) across sectors — agriculture, industry and services — will fall.

As incomes fall, three things will happen.

One, individuals (like you and me) will cut down their expenditure. In particular, all discretionary expenditure — be it an additional pack of cigarettes or a new car or a house — will come down sharply.

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Two, seeing overall demand fall, businesses, which were already not investing, will likely postpone their investments further.

Three, the government revenues will take a massive hit. This means that if the government wants to maintain its level of fiscal deficit (the gap between what it earns as revenues and what it spends), it will have to cut its overall expenditure this year.

These three types of “expenditures” — by individuals, businesses and government — essentially make up the GDP of India. There is a fourth component called net exports (that is, the net of exports and imports), but with the global demand plummeting as well, this too is unlikely to help matters.

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Of these four engines of growth, only the government has a “superpower” — it is the only one which can spend money even when it doesn’t have it. Moreover, when the government spends money — say Rs 100 — the economy moves ahead by far more than Rs 100.

Now let’s come back to why this economic package is being criticised.

The key criticism is that the government doesn’t seem to be raising its total expenditure — at least not by the quantum required to arrest the sharp decline in GDP.

According to an assessment by Prof N R Bhanumurthy of the National Institute of Public Finance and Policy (NIPFP) and published by National Council of Applied Economic Research (NCAER), the way things are going, India’s GVA will contract by a whopping 13% this year under the Base case scenario (see Table 1). The Base case scenario refers to a scenario where governments (both Centre and states) bring down their expenditure in line with their falling revenues to maintain their fiscal deficit target.

What this means, in turn, is that India’s GDP will decline by 12.5% under the Base case scenario.

To lift growth, the governments would have to spend more and counteract the natural downward spiral of the economy.

Table 2 gives the different simulations.

Source: Estimates using model from Bhanumurthy N R, Bose, S. and Satija, S. 2019. “Fiscal Policy, Devolution, and the Indian Economy”. NIPFP Working Paper No. 287, https://nipfp.org.in/publications/working-papers/1883/. New Delhi, December 2019

It shows that only if the government spends 3% of the GDP over and above what it promised to do in the Union Budget 2020-21, will the economic growth stay in the positive territory. Short of that, the Indian economy will contract. Of course, higher public spend will come at the cost of higher levels of fiscal deficits and higher inflation, but a growth contraction will come at the cost of widespread economic ruin, job losses and even deaths.

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At present, there is no sure-shot way of knowing what will be the final level of government spending at the end of this financial year. Most calculations suggest that — far from the promised level of 10% of the GDP — the actual government expenditure in the Atmanirbhar Bharat Abhiyan is just 1% of GDP. And we still don’t know if this 1% (of GDP) expenditure is over and above the Budgeted expenditure or will it be funded by expenditure cuts elsewhere.

It is clear then that Atmanirbhar Bharat Abhiyan economic package is likely to do little for India’s economic growth in this financial year, and that is why it is being criticised.

Stay safe,

Udit