India unveils ‘underwhelming’ $10bn stimulus for pandemic

  India unveils ‘underwhelming’ $10bn stimulus for pandemic hit economy (Amy Kazmin, 12 October 2020) India has unveiled plans to inject at least $10bn into its economy, amid warnings from economists that New Delhi has done too little to revive growth after the shock of its coronavirus lockdown. Nirmala Sitharaman, finance minister, said the stimulus scheme would increase capital expenditure, help cash-strapped states and encourage consumer spending with measures that included giving central government employees advance wages ahead of the upcoming festival season. Monday’s announcement comes days after the Reserve Bank of India said gross domestic product would contract by 9.6 per cent during the current April to March financial year – the first official acknowledgement of the magnitude of India’s economic crisis. However, economists reacted coolly to the new measures, concluding they would have only a marginal impact on an economy that contracted by 24 per cent year on year in the April to June quarter. As Ms Sitharaman announced the economic plan, the Bombay Stock Exchange slipped into negative territory, recovering later to close marginally up. “It’s pretty underwhelming”, said Shilan Shah, India economist at Capital Economics, which expects India’s economy to contract by 12 per cent this year. “It appears more symbolic rather than anything particularly meaningful.” The new measures are expected to provide a direct demand boost of less than 0.4 per cent of GDP, which Mr Shah called “very, very small.” The Indian government resisted economists’ calls to turn on the financial tap to support collapsing growth, fearing such a move would blow out its public finances and encourage international rating agencies to downgrade its debt. Ms Sitharaman again emphasised New Delhi’s commitment to fiscal prudence on Monday, though India’s combined fiscal deficit is already expected to soar as high as 13 per cent this year as revenues collapse. New Delhi plans to boost its capital expenditure budget for the year by 6 per cent, with the additional $3.4bn devoted to spending on roads, water supply, urban development and defence infrastructure. New Delhi will also give a total of $1.6bn in 50-year, interest-free loans to cash-strapped states to use for capital expenditure by March 31, or to pay outstanding bills for already completed work. New Delhi has also devised a complex scheme to permit central government employees, public sector bank staff, and staff of state-owned enterprises to use money allocated for home leave and other holiday travel to instead purchase consumer goods. All central government employees will also receive a Rs10,000 ($136) interest-free advance for the upcoming festival season. The funds – which will be given through a pre-paid card – must be spent by March 31, and will be repaid in 10 equal instalments. Radhika Rao, and economist from DBS Research Group, said New Delhi’s latest initiatives were designed to spur consumption “while also spending-lite so as not to put an additional burden on the exchequer in the midst of a notable shortfall of tax and disinvestment revenues”. (Kazmin, 2020) Extract 2 India needs a strong fiscal stimulus (Pulapre Balakrishnan, 15 April 2020) India has seen among the most stringent prevention responses to the Coronavirus disease (Covid-19) so far. It has hit the maximum in an index of stringency designed by the United Kingdom’s Overseas Development Institute. As economic policy in India following the onset of Covid-19 must address both the relief made necessary by the lockdown and restoration of the level of activity after it is lifted, we may consider these two aspects together, terming the overall response needed as “stimulus”. What should the extent of this fiscal stimulus be? The level of the US stimulus may be taken as a benchmark. Concerns have already been expressed that a stimulus in India should be approached with caution as it has implications for the fiscal deficit. At 10% of GDP for 2019–20, the stimulus would amount to approximately Rs 20 lakh crore. This may come across as a huge figure. However, it is actually quite close to the direct loss of GDP due to a month’s lockdown, estimated as a 12th of annual GDP. If we are to take the multiplier to be 1.25, the final figure for loss due to lockdown will exceed 20 lakh crore. So, with a fiscal stimulus amounting to 10% of GDP, we would be no more than compensating for the economic shock that accompanied the lockdown. Now, what of the implications for the fiscal deficit? What are we to make of the estimated figure of 14% of GDP for the fiscal deficit implied by a stimulus package of 10% of GDP? Well, as we are working with the figure for the US stimulus as a benchmark, it may be mentioned that one published estimate of the deficit implication of the US stimulus of two trillion dollars is that it will lead to a fiscal deficit of 14%. So, what is being proposed here is not unheard of