Explained: What The Third Covid Stimulus Could Bring For A Recovering Economy

Earlier today (12 November), the Union Finance Ministry made a series of 12 major announcements comprising the third stimulus package that includes additional expenditure of Rs 2.65 lakh crore.

The burning question is whether the 12 announcements would be sufficient in accelerating the pace of the economic recovery. For those looking for a short answer, the answer is a definite yes and this article will attempt to explain the likely mechanism through which this will have an impact.

But before we proceed, let us understand the approach adopted towards the stimulus.

The first stimulus focused on containing the damage of the lockdowns by addressing the cash-flow mismatch. This was done using emergency credit facilities, macro-prudential policies, deferred taxes and regulatory forbearance.

The objective was to prevent massive bankruptcies and to a major degree the objective has been met.

The second stimulus was given to primarily the government employees as they did not witness an income shock as such, with the objective of incentivising them to spend.

Additionally, the government reiterated its commitment towards maintaining its expenditure and pushed state governments to keep up with their expenditure commitments, including those on capital outlays.

Now we have the third stimulus, which comes at a time when the worst seems to be over and the economy seems to be transitioning from the normalisation of economic activity stage to the growth recovery stage.

One of the key issues that we must recognise is that economic activity recovers faster than labour markets. That is, economic activity will get back to the pre-Covid levels faster and labour market, or rather job creation will follow with a lag. This makes front-loading of government expenditure important.

In a very simplistic sense, as government demand gets economic activity back on track and subsequently, jobs are created leading to revival of private demand allowing for government to gradually pull back some of its support extended to the economy.

However, in pandemic, the front-loading of demand has implications when done during a lockdown as it would not have translated into immediate economic activity.

Therefore, there are prospects of prolonged delay in jobs being back which could lead to hysteresis.

The rural employment guarantee scheme could cushion some of the impact. However, the problem would be more so in the urban and semi-urban areas. A good scheme in that regard is the scheme launched to cover the EPFO contribution for companies with less than 1,000 employees for employees with wages up to Rs 15,000 for fresh employees.

The move incentivises job creation in the formal economy and the benefit of 24 per cent will be provided for the next two years. For companies beyond 1,000 employees, only 12 per cent is covered.

The scheme will definitely have a positive impact in the semi-skilled and unskilled non-farm employment generation in the economy and it must be viewed as a wage-subsidy programme which has been provided with the intention of taking over some of the wage-cost from companies’ balance-sheets.

The measure is thus to allow for the balance-sheet to repair paving way for fresh capacity creation in the economy.

There is a slight disagreement that I have with the ceiling of Rs 15,000 as it excludes states where the minimum wages itself are beyond Rs 15,000. An alternative could have been to provide the support irrespective of the wages up to Rs 15,000. However, the same could have been too costly as a programme.

Broadly, the scheme is in the right direction and covers most companies and 65 per cent of all those in the formal sector so there is nothing more that perhaps could have been done on this.

The other major announcement was to do with the emergency credit line guarantee scheme which has been extended till 31 March 2021, and the government has extended support to 26 sectors that are most stressed because of the pandemic.

The move is important as it provides adequate time for companies to make use of the additional capital get back to normal operations.

Similarly, the production-linked incentive schemes along with the other reforms are largely geared at attracting greater investments, whether from domestic companies or foreign firms in the manufacturing space in 13 champion sectors identified by the government so far.

These investments will play a major role in shaping up the composition of our economic activity in the post recovery phase.

The other significant change is with regards to the reduction in performance security to now be at 3 per cent instead of 5 to 10 per cent while EMDs will not be required for infrastructure related projects in the short run.

These moves are important as they unlock the locked capital which could be better utilised by companies elsewhere.

More immediate, however, is the extent of support that has been provided by the government to the real estate sector.

The first measure is an increased outlay for the PM Awas Yojana Urban and this has to be utilised within the present financial year itself.

It is well recognised by now that real estate sector is critical for assisting swift economic recovery due to its forward and backward linkages. The additional outlay will indeed give a fresh push to the affordable housing sector.

A key problem for the real estate sector has been of inventory accumulation which has plagued the sector for many years.

It is heartening to see a fresh incentive being offered by the government to home buyers by increasing the differential between the circle rate from 10 per cent to 20 per cent for fresh sales for homes with a value up to Rs 2 crore.

Since in many places, circle rates are higher than the actual value of the property, while registering the property homeowners have to pay a higher cost. By allowing for the 20 per cent differential, central government is reducing this cost.

This move comes with several states already cutting stamp duties, and therefore we should expect a pick-up in real estate sales, more so as mortgage rates of interest are between 6-7 per cent.

Overall, the measures announced today aim to further consolidate on the measures that have been taken by the government so far with the intention of ensuring swift economic recovery. As we address the constraints that we have faced to our growth in preceding years in the form of financial sector or the real estate sector, we can expect all engines to fire up over the coming few years.