The massive size of the stimulus announced largely took everybody by surprise because of the lack of fiscal space and warnings by rating agencies that deterioration in India’s fiscal outlook could put pressure on its sovereign rating. The government has to resort to either borrowing from the market or monetizing the deficit by the RBI to finance the package.

The sources of funding the package and reaction of the market as well as rating agencies will be keenly watched.

The government on 8 May sharply raised its gross borrowing for the current fiscal to ₹12 trillion, 54% more than budgeted, amid rising pressures on both revenue and expenditure because of the covid-19 pandemic. This is expected to push up fiscal deficit to 5.5% of GDP from the targeted 3.5% of GDP in FY21. It is not clear whether finance ministry will factor in the ₹4.8 trillion borrowing as part of the stimulus package. However, any additional borrowing this year will strain the fiscal deficit and debt to GDP ratio in FY21.

The most crucial bit is the time frame for implementing the package. If the ₹20 trillion bounty is spread over two to three years, it may not enthuse the market and industry very much. On the contrary, front loading the spending in FY21 could boost sentiment and provide a growth impetus to the economy.

While announcing the package, Prime Minister Modi indicated his government’s resolve to carry out bold reformsin areas such as land, labour, liquidity, and laws to build a “self-reliant India”. The strength of the reforms could reposition Modi as an economic reformer.

Modi has sought to empower farmers by building supply chains as well as rationalize the tax systems. Several attempts in the past for a new direct tax code to replace the close to six-decade old Income Tax Act have not borne fruit, with the latest recommendations, made by a task force, still under consideration.

Keen on encouraging local manufacturing and businesses globally relying more on technology for delivery of goods and services, streamlining of direct taxation and broadening its coverage of the digital economy will remain a key priority for the Modi administration. The government last year offered investment-linked direct tax incentives for sunrise industries like those involved in the production of semiconductors, electric charging stations and lithium ion batteries which have the potential to boost local production. Further simplifying customs related procedures, a reform area often flagged by the World Bank in its ease of doing business reports is also likely to be a priority.