Govt unveils Rs 7 lakh crores stimulus package; funded by Rs 3.44 lakh crore borrowings

The Government has brought out Rs 7.46 lakh crore stimulus to overcome the current economic slowdown. Two critical sectors – highways and public-sector banks will share the stimulus. Announcing the programme, Finance Minister Arun Jaitley said that the stimulus will be completed in the next two years.

First beneficiary of stimulus are the PSBs, who will be recapitalized by Rs 2.11 lakh crore. The major portion of the stimulus goes to the road sector as the proposed Bharatmala Pariyojana will be funded with Rs 5.35 lakh crores. Bharatmala’s main thrust is to construct a coastal highway of nearly 34800 km.

Funding of the programme

The funding of the programme is crucial element when the government is facing a strict FRBM based fiscal deficit target. Here, the government expect that of the total 7.46 lakh crores, 3.44 lakh crore will come from borrowings.

Item

Total amount (Rs lakh crores)

Borrowings/ bond issue

Non-borrowing component (Tax/budget/PPP) in Rs lakh crores

Capitalization of PSBs

2.11

1.35

0.76 (budgetary support)

Bharat Mala

5.35

2.09

1.06 (PPP), 2.19 (Central Road Fund)

Amounts are in Rs lakh crores

Economic stimulus impact and debt impact

The stimulus programme’s impact on the economy will be interesting as it would have different ability to influence the rest of the economy. Regarding the banking sector, the Rs 2.11 lakh crore stimulus will strengthen the banks and may enhance their ability to give loans. This is good as the overall lending activity may fund the weakening economic activities. But still, the stimulus impact will be much smaller compared to a general expenditure programme (like a development programme). The programme envisages a borrowing element of Rs 1.35 lakh crores from the sale of recapitalization bonds. At the same time, the level of indebtedness will be less severe as the funding of banks will be an asset creating activity for the government. 

Now, in the case of Bharatmala, the programme has a unique feature, it is a finishing programme for NHDP. The NHDP is in its final phase and the remaining parts are aggregated under Bharatmala. Another unique element of Bharatmala is that it has own funding support in the Central Road Fund. The CRF revenue is procured from imposing road cess on petrol and diesel. Revenue for the CRF during the last year was a whopping Rs 81000 crore. This is a high amount and the CRF may cross Rs 2.19 lakh crore for the next two years as assumed by the FM. An amount of Rs 1.06 cores is expected from the private sector through PPPs. Hence, the stimulus on Bharatmala is leaving only Rs 2.09 lakh crores borrowings and it is a sizable amount that can cause slight pressure on government budget.

The economic benefits of the road project will be substantial as the fund flow of Rs 5.35 lakh crores may share in the overall economy. Besides, it will raise overall productivity with decreasing transportation cost.

From the fiscal angle, the government borrows Rs 3.44 lakh crores in an extra-budgetary exercise to support this stimulus. Compare this with the total borrowing in the budget (2017) – Rs 546532 crores, the Rs 3.44 crores debt element is substantial.

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Tags : economic stimulus programme