Second stimulus will provide minimal support: Moody’s
The small scale of the stimulus reveals limited budgetary firepower, the rating agency said
India’s latest demand stimulus measures totalling ₹46,675 crore or 0.2% of GDP highlights the country’s “very weak fiscal position” and will provide limited support to growth, Moody’s Investors Service said on Thursday.
“Notwithstanding the fiscal prudence of the measures, the small scale of the stimulus highlights limited budgetary firepower to support the economy during a very sharp contraction, a credit negative,” said the rating agency, which has assigned India the lowest investment grade with negative outlook.
“While the latest stimulus will spur consumer spending over the near term as coronavirus-related restrictions continue to be eased and India’s festive season begins, the support to growth will be minimal. The government expects the new stimulus to add around 0.5% of GDP—a small boost compared with the 11.5% drop in real GDP that we forecast in fiscal 2020,” Moody’s said.
The new stimulus measures, which includes cash payments to government employees and interest-free loans to states aims to boost consumer spending during India’s festive season and to increase capital expenditures. “The measures will involve additional direct official spending of around ₹41,000 crore, but will not require fresh funding given that the government lifted its borrowing limit earlier in 2020 to allow for coronavirus-related expenditure. Even when combined with the government’s fiscal stimulus earlier in 2020, the size of the measures remains modest. In total, the two rounds of stimulus bring the government’s direct spending on coronavirus related fiscal support to around 1.2% of GDP. This compares with an average of around 2.5% of GDP for Baa-rated peers as of mid-June,” Moody’s said.
Moody’s expects India’s debt burden to touch 90% of GDP in 2020, up from 72% of GDP in 2019 which is significantly higher than the median of similar rated countries, of around 59%. “The large debt burden is driven by chronically wide fiscal deficits. The general government deficit expanded to 6.5% of GDP in fiscal 2019 (which ended March 31, 2019). In fiscal 2020, we expect weaker government revenue, driven by the economic contraction and reduced corporate tax rates announced in September 2019, to widen the general government deficit to around 12% of GDP,” it added. However, Moody’s expects the Indian economy to rebound to 10.6% in FY22, reflecting the comparison with the low GDP levels of FY21 as economic activity gradually normalises.
“Over the medium term, we expect growth to settle around 6%, with downside risks due in part to ongoing stress within the financial system,” it added.
The rating agency praised the series of recent agricultural sector and labour law reforms, holding that they could provide support to medium-term growth, if implemented effectively.
“The agriculture reforms aim to increase efficiencies in the fragmented supply chain by expanding farmers’ direct access to produce markets. The labour law reforms consolidate and amend laws related to trade unions, conditions of employment in industrial establishments, and settlement of industrial disputes. Of particular significance is the raising of the threshold at which an employer must seek government approval for layoffs, to 300 from 100 workers, which provides some increased flexibility to employers and could help to increase India’s competitiveness,” it added.