The Financial Reality of India's 20 Lakh Crore Economy Stimulus: Sources and Effects

Narendra Modi's announcement of a 20 lakh crore stimulus package has sparked both excitement and skepticism in the Indian economy. The question naturally arises: where will the money come from? This article sheds light on the sources and implications of the stimulus, aiming to provide a clear understanding of its financial backing and its expected impact.

Where is the Money Coming From?

Tax increases, particularly from the middle class, seem to be a primary source of funds. According to many experts, this is the only way to maintain the promise without burdening the fiscus further. Direct cash transfers are unlikely, as the package is primarily composed of tax relaxations, subsidies, and supply-side reforms. These changes will still need to be funded with revenue from taxes and other financial mechanisms. It is not money, but a restructuring of the budget.

Market Borrowing and Subsidies

Too many believe that the package involves tangible cash transfers, but it's more accurate to view it as a reconfiguration of the budget. The bulk of the funds will come through borrowing from the market and banks. In fact, much of the package is based on guaranteed loans to MSMEs, changes in existing schemes, and the diversion of funds from other allocated sources. This leaves the actual cash stimulus at about Rs 2 trillion, or roughly 1% of GDP.

The Reserve Bank of India (RBI) is also set to boost liquidity through measures amounting to Rs 8 trillion, but most of this is not real fresh money but rather manipulating financial market conditions.

Effects of the Stimulus and Reforms

The stimulus is expected to have only a small direct effect, while most of the benefit will come from supply-side reforms that are designed to make business easier and more efficient. These reforms aim to reduce bureaucratic hurdles, improve the ease of doing business, and stimulate growth in the long run. However, these measures are unlikely to prevent an economic downturn in the current fiscal year, as the government anticipates a painful recession. The hope is that these reforms will pay off in higher growth rates in the future.

Critique of the Package

Some critics suggest that the package is largely a fiction, with most of the funds coming from guaranteed loans to MSMEs, shifting of existing packages, reallocation of funds, increases in cess and taxes, higher fuel prices, and potential money printing, which could lead to inflation. This inflation will primarily affect the middle class, as these groups rely heavily on wages rather than investments or capital.

Thus, the 20 lakh crore package is more a rearrangement of existing fiscal measures and financial strategies rather than a new infusion of cash. The effectiveness of the reforms in revitalizing the economy remains to be seen, with the current economic challenges set to persist.

A Final Thought

Like searching for a ring in the ocean, finding the exact source of this stimulus is challenging. It is in the depths of the financial system, hidden in the complexities of the Indian economy. It may not be as impossible as it seems, but it certainly requires a deep dive into the intricacies of fiscal policy and economic reform.