Stimulus 3.0 Decoded! Modi Government announcement under microscope - Top 3 focus areas

In stimulus 3.0 announced yesterday by FM Nirmala Sitharaman, government focuses on jobs, credit, capex, and real estate. The government announced measures focused on job creation, reducing distress in stressed sectors, income tax relaxation for home buyers, and capital spending. While these measures have projected benefits of a whopping Rs 2.65 tn, the fiscal cost is likely to be Rs 1.26 tn (0.7% of GDP). Given that expenditure growth until now has been muted and our estimates had factored in additional spending, Kotak Institutional Equities retain their FY2021E GFD/GDP estimate of 8%.

Focus 1 is on Employment Generation:

To address the issue of job losses during the pandemic, especially in smaller enterprises, the government launched Atmanirbhar Bharat Rozgar Yojana. It provides incentives in the form of subsidies to EPFO registered establishments. The scheme would be applicable for employees with incomes less than Rs 15,000 per month and is likely to cover 65% of all employees in the formal sector. Additionally, to boost rural employment, the government increased the outlay under PM Garib Kalyan Rozgar Yojana by Rs 100 bn to complement the government’s efforts through MGNREGA and PMGSY.

Focus 2 is on to give Credit to Stressed Sectors:

The government had earlier extended the Emergency Credit Line Guarantee (ECLG) scheme until March 31, 2021 given that Rs 1.5 tn (Rs 2.1 tn sanctioned) has been disbursed as against an announcement of Rs 3 tn. Under Atmanirbhar 3.0, the government has expanded the scheme to cover the 26 stressed sectors identified by the Kamath Committee (including health). The scheme provides additional credit (guaranteed and collateral free) of up to 20% of outstanding to entities with outstanding credit between Rs 0.5 bn and Rs 5 bn as on February 29. The tenor would be five years including a moratorium of one year on principal repayment. The scheme seems fairly exhaustive given that loans will be extended to SMA-0 entities. While the impact could be limited given that these entities may have had a low probability of becoming NPAs, it provides support.

Focus 3 is on Real estate, Fertilizer Subsidies, Capex and Infra financing:

The government also announced sector specific measures:

(1) Given strong linkages between housing and employment, the government increased the allocation on PM Awas Yojana (PMAY) Urban by Rs 180 bn (implementation will be key).
(2) Income tax relief for developers and home buyers (by increasing circle rate and agreement value differential to 20% for primary sale of unit value up to Rs 20 mn).
(3) Additional allocation of Rs 650 bn to fertilizer subsidies (perhaps to pay back the arrears to fertilizer companies).
(4) Rs 60 bn equity infusion in the NIIF debt platform for boosting infra (target is to create infra financing of Rs 1.1 tn by 2025).
(5) Relief for construction / infrastructure with relaxation of Earnest Money Deposit (EMD) and performance security requirements for government tenders.
(6) Capex of Rs 102 bn towards defense, green energy, etc.
(7) Funding of Rs 60 bn to EXIM bank for pushing exports.

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Maintain FY2021E GDP estimate of 8%

The fiscal cost of the announcements (assuming it is spent this year) is likely to be around Rs1.26 tn (0.7% of GDP). This additional cost falls within GDP estimate of 8% as Kotak had earlier accounted for an additional spending of Rs 1 tn. First half of FY21 expenditure growth has been muted, overall contraction of 1% with revenue expenditure growth of 1% and a 12% fall in capex. With the government maintaining an adequate cash balance, Kotak expects the center's borrowing plan of Rs 12 tn to remain unchanged (excluding borrowing done on behalf of states) though short-term borrowings are likely to be higher than budgeted.