Lack of robust stimulus may worsen slowdown
The package may just be around 1.5% of GDP, say economists
NEW DELHI: The centre’s stimulus package may have an impact of only 1-1.5% of gross domestic product (GDP) on the exchequer, with the government relying more on liquidity support measures. With the government further extending the lockdown till May 31 to curb the coronavirus pandemic, the lack of substantial demand stimulus may further deepen the economic downturn in the short run.
Finance minister Nirmala Sitharaman announced the fifth and last tranche of measures with a ₹40,000 crore increase in allocation for the rural jobs scheme. With earlier announcements by the government, including the ₹1.7 lakh crore under Pradhan Mantri Garib Kalyan Yojana, most analysts put the total fiscal impact between ₹2-3 lakh crore in FY21. The total package, however, exceeded PM Narendra Modi’s announcement of ₹20 lakh crore, with the finance ministry factoring in ₹8.01 lakh crore liquidity infusion by the Reserve Bank of India.
The announcements, however, failed to enthuse many economists who said the absence of a robust stimulus programme may fail to reinvigorate economy.
“In the absence of a proper stimulus, we are looking at a contraction of 9% in GDP in FY21,” former chief statistician Pronab Sen said. “The announcements will help a little but are not enough to change the projection. We should actually have a proper fiscal stimulus of ₹8-10 lakh crore. Even before covid-19, we had a demand problem and we were talking about fiscal deficit should be closer to 5% of GDP.” Asked whether the threat of a rating downgrade prevented the government from going for a larger package, Sen said: “If in a crisis of this kind, you are worried about rating agencies, then something is wrong with you. Who cares more about foreign money than about your own people,” he said.
Fitch Ratings and Moody’s Investors Service have cautioned that the country’s sovereign rating could be downgraded if its fiscal metrics weaken materially.
However, batting for pump priming of economies across the world, International Monetary Fund chief economist Gita Gopinath last month said while a substantial fiscal stimulus will push up the fiscal deficit and debt-toGDP ratio of economies, lack of proactive fiscal policy could put them in a worse place with collapse of economic activity.
DK Srivastava, chief policy adviser at EY India, said the limited demand stimulus of about ₹2 lakh crore would imply a lowering of growth than what otherwise would have been possible and, therefore, a lowering of tax revenue, and in general, a delay in the overall recovery. “It would be low growth at least for six quarters before a clear upward trend in growth emerges. More direct stimulus should have been given rather than relying on credit guarantee schemes where the impact depends on private sector behaviour,” he said.
Pranjul Bhandari, chief economist at HSBC India, said as the lockdown eases gradually, postponed consumption demand and inventory restocking demand could provide a growth push. “Once that wave is gone, India may not have a strong driver of growth, especially given weak labour markets.”