A comprehensive package of policy reforms, financial incentives and monetary measures is in the works to re-energise the economy by giving more fiscal space to the states, accelerating public works, easing the availability of credit and putting more cash in the hands of the people to generate demand, three people aware of the plan said.

The package is expected “sooner than later,” said the people, who requested anonymity. It is likely as soon as this week, they said, noting that restarting the economy, buffeted by the coronavirus crisis and the consequent lockdown, will require special efforts by all stakeholders, including the government and industry

“The PM will take a final call based on feedbacks from states and key ministers and top bureaucrats,” said one person, who has direct knowledge of the matter.

To be sure, an economic package has been in the works since late March. The expectation was that the government would announce it in early April.

The third phase of the lockdown, enforced on March 25, expires on May 17, it is expected to give greater freedom to economic and business activity, with some restrictions remaining in place to check the spread of Covid-19.

The pandemic spread to the Indian economy at a time when it was already vulnerable, having been hit by the double whammy of a downturn in household spending and private investment plus a credit crunch. The International Monetary Fund (IMF) has predicted that growth in Asia’s third largest economy would slow to 1.9% in fiscal 2020-21, the slowest pace in three decades. This month, credit assessor Moody’s Investors Service forecast zero growth for India in the year, down from an estimated 4.8% in 2019-20. Those numbers look optimistic when compared to securities firm Nomura’s estimate of a contraction of 5.2% in GDP in 2020-21. The firm had previously estimated a contraction of 0.4%.

The people cited above outlined the broad contours of the draft stimulus package. For one thing, the Centre is in talks with state government to relax provisions of the Fiscal Responsibility and Budget Management (FRBM) Act so that the latter can borrow money to finance the fight against Covid-19. The FRBM Act mandates states to keep their fiscal deficit at 3% of stategross domestic product (SGDP); states want greater leeway to borrow because they are strapped for funds — they have suffered a revenue loss from dwindling tax collections because of the lockdown.

To be sure, the exemption from the FRBM Act may not be unconditional. States will also have to commit to wide-ranging reforms in areas such as labour regulations, agricultural marketing, urban development and power distribution, a second person said.

The Centre on Friday raised its own market borrowing estimate for 2020-21 to Rs 12 lakh crore from Rs 7.80 lakh crore estimated earlier to make up for an expected shortfall in revenues. According to an economic analysis on Monday by Nomura, this suggests a FY21 fiscal deficit of over 5.5-6.0% of GDP. Nomura expects the central government’s fiscal deficit to expand to 7% of GDP in FY21, double its original target.

The Centre may again raise its borrowing limit to fund a series of welfare schemes and stimulus packages, the second person said.

Nomura said the extra borrowing announced by the Centre on Friday could be enough to take care of the fiscal slippage because of economic underperformance, but not sufficient to cover the extra Covid-19 fiscal support. “Thus, we see a risk of more extra-borrowing announcements in H2 FY21, as the full extent of the fiscal slip becomes evident,” it said.

The proposed stimulus package will also have a component to boost demand that would include direct cash transfers to the underprivileged sections, the people said. The Centre will also prod public sector banks to transmit the benefits of policy rate cuts announced by the Reserve bank of India, they added. “If required, the RBI could consider the option ofquantitative easing as a mechanism to reduce cost of borrowing,” the first person said.

Quantitative easing is undertaken by a central bank to increase money supply in the economy prompting commercial banks to lend aggressively and thereby raising consumer spending. It involves the central bank buying government assets, particularly government bonds with the money it creates.

According to the people, the central bank could consider reducing policy rates further to make personal and corporate loans cheaper to boost consumption and investment. On March 27, RBI slashed the policy rate by 75 basis points to 4.4% and also infused Rs 3.74 lakh crore of liquidity into the banking system. One basis point is one-hundredth of a percentage point.

The package will have specific schemes to support micro, small and medium enterprises (MSMEs), but many policymakers believe the incentives should be routed through agencies such as banks, non-banking finance companies (NBFCs) and the Small industries Development Bank of India (Sidbi), the people said. The government is also considering giving sector-specific fiscal and policy support to large industries such as airlines, hospitality and tourism that have been the worst-hit by the pandemic, they added.

They said the proposed package focuses on a Rs 111 lakh crore National Infrastructure Pipeline (NIP) to accelerate growth and create employment in both urban and rural areas. The NIP is already under execution as 40% of the projects worth Rs 44 lakh crore are at various stages of implementation.

To encourage industry to boost output, the government is planning production-linked incentives on the lines of those offered to large-scale electronics manufacturing, the people said. The government on April 1 notified a Rs. 40,995 crore incentive package for electronics manufacturing that would provide direct employment to over 200,000 people in five years.

Battered by the prolonged Covid-19 crisis and lockdown, industry has been awaiting a significant stimulus of about Rs 10-16 lakh crore that would create demand, infuse liquidity and support production.

Sangita Reddy, president of the Federation of Indian Chambers of Commerce and Industry (Ficci), in a letter to finance minister Nirmala Sitharaman on Sunday urged immediate support to the economy, highlighting liquidity issues.

Ficci has proposed a comprehensive stimulus package worth Rs 10 lakh crore; it also wants some immediate measures including the release of Rs 2.5 lakh crore in the form of refunds and other government payments that have been stuck.

Reddy called for additional support to vulnerable communities over and above the Rs.1.7 lakh crore announced in March in relief measures to the poor, financial support to MSMEs, reinforcement of health-care infrastructure to deal effectively with the public health crisis and support for sectors that have borne the brunt of the pandemic.

The Confederation of Indian Industry (CII) said the impact of prolonged lockdown on the economy is severe and demanded a stimulus package of Rs 15 lakh crore, substantially revising its month-old estimate of Rs 4.5 lakh crore, HT reported on Friday.

“By the time the third phase of the lockdown ends, the economy would have lost almost two months of output,” Vikram Kirloskar, president of CII, said.