InvestorQ : I have two questions on the Stimulus program? Where the government get so much funds from and what happens to the fiscal deficit levels?
Dawn Cherian made post

I have two questions on the Stimulus program? Where the government get so much funds from and what happens to the fiscal deficit levels?

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Mitali Bhutta answered.
2 weeks ago
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You are absolutely right. The biggest question now is where the money for the stimulus comes from and whether the fiscal deficit levels will breach on the upside? Here are some key points that you must know about funding this package.

· At the present moment, there is not much clarity on how the funds will come because the total size of the stimulus till date has been $400 bn.

· While half of the above stimulus is monetary in nature, the other half is necessarily fiscal in nature and requires financial allocation to be done.

· It looks like the government is betting that the collections of direct and indirect taxes sharply pick up in the coming months as output gets back to normal. For the current fiscal year, LIC IPO does not look feasible considering statutory formalities involved.

· One strategy could be to charge higher dividends from profitable PSUs and also get funds via buybacks from profitable and cash-rich PSUs.

· The last option is about RBI monetizing the deficit, but that would be the very last resort considering its inflation implications. Yes, funding still remains the big question mark.

· Economists have raised apprehensions about the escalating fiscal deficit now pegged at 10.5% of GDP after the third round of stimulus.

· That has the potential to take up yields sharply and also to impact the sovereign ratings of India as well as to impact the rupee value. 10.5% versus 3.5% is not acceptable.

· The reality is that the government does not have a choice as that is the only way to revive growth in a quick and predictable way.

For a country like India with low levels of per capital income, recovery in GDP is more critical than controlling fiscal deficit; at least for the time being.
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