Nirmala Sitharaman’s economic relief measures are largely credit guarantees, little else

The government announced a set of relief measures announced last evening. They included:

a) 50 percent increase in the allocation towards the Emergency Credit Line Guarantee Scheme (ECLGS) to Rs 4.5 trillion versus Rs 3 trillion earlier. Of the latter, Rs 2.69 trillion had already been disbursed;

b) guarantees to banks to lending to the microfinance sector;

c) loan guarantees worth 1.1 trillion to COVID-hit sectors, a little less than half will be channelled to the health sector;

d) Atmanirbhar Bharat Rozgar Yojana (ABRY), a program to incentivise employment, stands extended till Mar22 from the current deadline of June 21;

e) plans announced earlier i.e. free food grain distribution and increase in subsidy outlays.

While the headline impact of the announcements is sizeable, for much part these were credit guarantees, making the net impact on the fiscal math smaller. Of these – subsidies, free food-grain distribution Rs 930 billion and support towards paediatric health besides a couple of smaller items, amounting to 0.5-0.6 percent GDP, might impact the fiscal math. Add to this are higher pay-out for vaccine rollout.

Even as modest pressures on the FY22 fiscal balance surface, the math might find some wiggle room from higher nominal GDP (higher deflators) and a likely reprioritisation in existing spending heads to minimise the risk of a deficit slippage beyond the targets. Notwithstanding the buffers, risk of a small slippage of 0.3-0.5 percent of GDP in the FY22 deficit target of (-)6.8 percent of GDP is emerging.

On the economy front, the daily COVID caseload has fallen to a tenth of the May’s peak, allowing the unlocking process to continue. Concerns over a third wave and impact of a new Delta plus variant is, however, under watch.

Surge in the global oil and uptick in US yields will be bigger drivers for Rupee bonds than Monday’s (June 28) fiscal support measures. Forming a base above 6 percent, 10Y (generic) yield was underpinned by the RBI’s decision to cancel the benchmark bond auction late last week, whilst short tenors were devolved. As the existing benchmark’s issue size surpasses Rs 1.19 trillion, markets expect a new 10Y benchmark paper to be announced shortly. Even as the 10Y yield has moved little in the past fortnight (as RBI holds most of it), yields elsewhere have ticked up, for instance 5Y and 7Y yields are up 15-30 bps since mid-June.