Fiscal Response to Covid-19: Focus on the Most Vulnerable

01 APRIL 2020

Fiscal Response to Covid-19: Focus on the Most Vulnerable

• The Finance Minister, on Thursday (March 26th) unveiled a fiscal package worth INR 1.7 Lakh Cr (0.75% of GDP) focusing on the most vulnerable sections who would be disproportionately affected by the current national lockdown.
• To ensure food security, the government increased allocation of free rice, wheat and pulses for poor families for the next 3 months, costing the government ~INR 425tn (0.2% of GDP).
• INR 455bn allocation made towards various direct benefit transfer schemes. The government also frontloaded the first instalment of disbursement under PM Farmer income support scheme to early April (~INR 175bn).
• Free medical insurance for health professionals involved in the fight against Covid-19. The Prime Minister had earlier announced an allocation of INR 150bn for improving medical infrastructure.

1QFY21 likely to be a washout quarter

Source: CSO, CEIC, Citi Research Estimates
• For companies with <100 workers, both employer and employee contribution towards provident fund will be paid by the government for 3 months.
• States have been directed to provide relief to construction workers, directly affected by the lock down, using the INR 310bn welfare fund. Other measures included an 11% increase of wages paid under MNREGA and free LPG cylinders to poor families.
• Citi analysts believe there could be further fiscal space to the tune of 0.5% of GDP which could be used to provide a relief package for business and taxpayers. While the government’s resources are focused on revenue expenditure (lower multiplier) for immediate relief, planned private investments could be pushed back given significant downgrade of global and domestic growth.
• Citi analysts expect lower working days in 4QFY20 and 1QFY21 to drag the GDP growth by ~400bps, spread between the two quarters.