‘Second stimulus may stop contraction in the economy’

₹111 lakh-crore borrowing-based programme needed to restore growth: EY India report

NEW DELHI: A second round of fiscal stimulus in the latter part of the financial year may help arrest the strong contractionary momentum in the Indian economy, and a borrowing-based full implementation of ₹111 lakh crore is needed to restore growth and generate tangible employment, consultancy firm EY India said in its latest edition of Economy Watch report.

Union finance minister Nirmala Sitharaman made the announcement of the first stimulus on March 26 to immediately provide relief to the poor through direct cash assistance, free food grains, and cooking gas to deal with the Covid-19 pandemic. It was followed by monetary measures announced by the Reserve Bank of India (RBI) to infuse liquidity in the system. Sitharaman announced a fivepart stimulus package between May 13 and May 17, providing credit guarantee to the industry along with far-reaching policy reforms. The government said the total value of all announcements since March 26, including RBI’s monetary measures, was ₹20.97 lakh crore.

The report said India’s growth projections by global institutions like the International Monetary Fund (IMF), World Bank, and Asian Development Bank (ADB) had been downwardly

revised despite a series of measures to stimulate the economy between March end to mid-May. It added it shows that the package had only a “limited impact” in reversing the contractionary momentum, which mainly relates to the nationwide lockdown to check the spread of Covid-19.

The World Bank on June 8 projected India’s FY21 growth to contract by 3.2%, a downward revision from its earlier forecast of 2.2% on April 12. IMF’s World Economic Outlook Update on June 24 also sharply revised down its earlier growth projection of 1.9% for India to (-)4.5% in FY21. ADB revised its projection even more sharply from its earlier 4.0% to (-)4.0% on June 10.

DK Srivastava, the chief policy advisor at EY India, said the downward revisions in growth forecasts by international agencies came after factoring in the stimulus packages announced by RBI and the finance ministry by mid-May. “Clearly, these stimulus packages were not considered to be enough to reverse the contractionary momentum of the Indian economy,” he said.

Citing global rating agency Fitch’s report this month— ‘Coronavirus Macro Policy Responses Unprecedented: Tracking Policy Easing in the Fitch-20 Countries’ — he said, “In the case of new fiscal measures, India was placed last but one after Mexico. India’s fiscal measures amounted to only 1.1% of GDP [gross domestic product]... whereas the largest fiscal injection was given by Brazil at 13.5%, followed by the US at 11.5%. In the category relating to monetary easing, India was placed well below a number of countries such as Turkey, South Africa, Brazil, the US, Canada, Mexico, and Poland. India’s rate reduction amounted to 115 basis points as compared to 300 basis points for Turkey and 250 basis points for South Africa.”

He said policymakers are constrained in terms of offering larger stimuli because of a number of India-specific challenges particularly since the growth had slowed even before the Covid-19 crisis and there was a contraction in gross tax revenues.

The report foresees a need to have another stimulus measure with more focus on capital expenditure. “A second round of fiscal stimulus in the latter part of the fiscal year may help arrest the strong contractionary momentum in the Indian economy. There is also scope to further reduce the repo rate,” Srivastava said.

“It is not only the size of the fiscal stimulus but also its composition in terms of low multiplier expenditures [revenue expenditures] viz-à-viz high multiplier expenditures [capital expenditures], which matter.”

The report acknowledges that lower revenue collection would constrain the Centre’s fiscal capacity to announce a larger stimulus. “In order to break out from the vicious circle of low tax revenue-low fiscal stimulus-low real and nominal GDP growth in addition to coping with COVID-19, the Centre has to develop a strategy which requires a borrowing-based full implementation of NIP [National Infrastructure Pipeline],” it said.

Sitharaman in December unveiled the ₹102 lakh crore NIP for economic and social infrastructure in line with the aim to make India a $5 trillion economy by 2024-25.

CA Vijay Kumar Gupta, former Central Council Member of the Institute of Chartered Accountants of India (ICAI), said, “It is too early to assess the impact of economic stimuli announced so far. However, more fiscal and monetary interventions will be required to bring the economy back on track.”

› In the case of new fiscal measures, India was placed last but one after Mexico. India’s fiscal measures amounted to only 1.1% of GDP

DK SRIVASTAVA, chief policy adviser, EY India