Reliefpackageandashotathistory

Sometimes some events are so historic that they become the fulcrum around which history is measured. The Gregorian calendar uses one such event to divide the flow of history into BC and AD. Though not on the same scale, it is clear that the current virus pandemic is capable of creating its own BC (before Corona) and AC (after Corona) calendar. The pervasive global nature, the deep social impact and unprecedented economic response, all combined, make the current pandemic take a shot at making history.

Talking about the economic responses, yesterday the Indian Prime Minister announced in a televised address to the state that government is going to come up with a package worth 20 lac Crore INR. We will take a moment to grasp the enormity of the number. The total estimated union budget size for the year 2020-21 was 30 lac crore with an estimated fiscal deficit for year pegged at 7.96 lac crore. So it is 2/3 of the annual budget figure. India’s GDP is around 2.1 Trn USD, the package amounts to 266 billion USD calculated at the current exchange rate of 75. This makes it around 10% of GDP.

Now coming to the details, the headline number includes all previous relief measures announced by the government and RBI. Further to that the fine print will be released by the FM in a series of press meetings over coming days. But even if the actual on the ground number comes out lower than expected, the headline is big enough to cause ripple effects across different markets.

Equity markets will cheer the announcement as it brings demand back. The Nifty is up 2% in trading today.

Bond markets, which got spooked by the extra borrowing announcement last week, will have a further reason to be wary as the package would necessitate further borrowing from the government. Rating agencies will also take a keen look at the government finances to make their call, a fact which will have a bearing on the bond markets. However the bond market is not showing its nervousness in prices as of yet. The old 10 yr benchmark is trading at 6.16 now, mostly unchanged from the previous close.

The direction of Rupee will be decided by a delicate balance between the outflows on account of bonds and inflows on account of equities. The Rupee has appreciated to trade at 75.30 now versus 75.50 at yesterday’s close.

Now lets give some historical context to the action. The branch of economics that deals with general theory of demand and supply is called the neo classical approach which is in contrast to the classical approach which just deals with the production of goods (and services). Dirk Philipsen in his book The Big Number traces this history and writes that post the great depression a new thought process permeated the neo classical thinking which entailed that government should be an active participant in supporting the demand supply curve. Hence it should spend even beyond its means in the time of distress and keep the economy going. The thought process resulted in FDR’s New Deal with 3 R’s (Relief, Recovery and Reform).

For India the new deal rests on the promise of 4 L’s (Land, Labour, Liquidity and Law) . Lets see how much it translates into action once the fine print is unveiled.