Covid-19 India’s Fiscal Challenge – Economics

Table of Contents

FORECASTS

The immediate future appears dire for large emerging markets like India.
The International Monetary Fund (IMF) slashed India’s growth forecast for 2020 from 5.8% to 1.9%.
The World Bank estimated that India would grow 1.5% to 2.8% in 2020-2021, the lowest since the start of 1991 economic reforms.

Given the severity of the crisis, the Reserve Bank of India (RBI) has responded proactively to ease liquidity concerns.
However, this credit easing policy is yet to be transmitted to many firms.

In contrast to monetary stimulus, the Indian government’s fiscal stimulus efforts are inadequate.
India’s fiscal stimulus is less than 1% of its GDP (Rs. 1.7 trillion).
This stimulus is trivial compared to the magnitude of stimulus injections undertaken by many East Asian countries like Malaysia (16.2%).

The Asian Development Bank and the World Bank will offer relief packages to India worth $1.5 billion and $1 billion respectively.
These packages would only be supplementary to the larger fiscal stimulus package that India may need to roll out.
With a government debt of around 72% of GDP, India’s fiscal room to opt for a massive stimulus appears much more limited.
Any aggressive stimulus spending will result in a surge in India’s gross public debt and will negatively influence its credit ratings.

Foreign investment in government securities should be encouraged to seek capital flows.
India has foreign exchange (FX) reserves of around $476 billion.
Given the likely pressure on its balance of payments moving forward, utilising FX reserves does not seem to be viable at the moment.
A radical financing option would be to monetise the deficits by allowing the RBI to print money to buy the government bonds as long as inflation remains under check.

Offer disaster relief and eventually kick-start the economy.
Proper governance of any massive fiscal spending
India needs to be concerned as it possesses the least state capacity to make tough decisions to return to a trajectory of fiscal credibility.
Re-prioritising expenditures towards greater spending on health and social safety nets for low-income households.