Weak Impulse: Small stimulus is a negative, says Moody’s

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October 16, 2020 8:00 AM

The International Monetary Fund this week forecast a steep 10.3% contraction in India's GDP this fiscal, which will enable even Bangladesh to beat India in per capita GDP.

Though the government expects the fresh round of stimulus to add around 0.5% of GDP, it will be a small boost compared with a likely 11.5% contraction in real GDP in FY21, Moody’s said.Though the government expects the fresh round of stimulus to add around 0.5% of GDP, it will be a small boost compared with a likely 11.5% contraction in real GDP in FY21, Moody’s said.

Calls for a more meaningful fiscal support to the economy are growing, with pledge of allegiance from the most unexpected of quarters. India’s fiscal support through the two rounds of stimulus so far to fight the Covid-19 pandemic stood at just 1.2% of its gross domestic product (about Rs 2.4 lakh crore), way below the average of about 2.5% for similar-rated peers, global rating agency Moody’s said on Thursday, buttressing the need for a more aggressive government spending to reverse a record slide in growth.

“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,” the agency said in a statement.

Batting for more higher fiscal spending, chief economic adviser (CEA) Krishnamurthy V Subramanian told a TV channel on Tuesday that a solid boost to infrastructure and employment-related programmes like an urban job guarantee programme would help pep up consumption demand.

The second round of stimulus, extended on October 12, involved a budgetary support of just about 0.2% of GDP. This will provide only limited support to growth and highlights “credit-negative fiscal constraints”, according to Moody’s. But experts have found ways for raising the financial resources necessary for augmenting government spending, without a fiscal catastrophe.

Speaking at the Indian Express Group’s Explained.Live programme on Wednesday, Sajjid Chinoy, chief India economist at JP Morgan, suggested that the government resort to a sale of its assets to fund infrastructure projects, given that private investments will take time to resume. Higher government spending in infrastructure will create employment, improve earnings of people and stir consumption on a more sustainable basis, he said.

Though the government expects the fresh round of stimulus to add around 0.5% of GDP, it will be a small boost compared with a likely 11.5% contraction in real GDP in FY21, Moody’s said.

India’s real GDP contracted by a record 23.9% in the June quarter, the sharpest dip among G-20 countries. The International Monetary Fund this week forecast a steep 10.3% contraction in India’s GDP this fiscal, which will enable even Bangladesh to beat India in per capita GDP.

The Covid-ravaged economy will likely shrink by a record 9.5% in the current fiscal, Subramanian said, as he agreed with the Reserve Bank India’s latest assessment of the magnitude of growth slump.

Moody’s forecast India’s growth to rebound to 10.6% in the next fiscal, substantially aided by a favourable base effect. But over the medium term, growth could settle around 6%, with “downside risks due in part to ongoing stress within the financial system”.

However, the agency gave a thumbs-up to a series of structural reforms proposed in factors of production like agriculture and labour, asserting these could provide support to medium-term growth, if implemented efficiently.

“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 said.

Similarly, the agriculture reforms aim to raise efficiencies in the fragmented supply chain by expanding farmers’ direct access to markets, it said.

The agency expects general government debt burden to peak at around 90% of GDP this fiscal, compared with about 72% a year before, which is significantly higher than the median of around 59% for similar-rated economies.

Finance minister Nirmala Sitharaman on Monday sought to create additional demand of Rs 1 lakh crore in the economy in the current financial year, through a clutch of steps that may involve less than Rs 40,000 crore or a tenth of the amount to be saved via expenditure controls already announced, as budgetary cost to the Centre. However, some analysts have said the government’s expectations of extra demand creation may prove to be over-estimates (it assumes the private sector will also emulate its steps and create an additional demand of Rs 28,000 crore).

The stimuli announced earlier had an estimated budgetary cost of around Rs 3 lakh crore, going by even the most optimistic of analyst projections. As FE had reported earlier, the spending curbs on departments for the April-December period is estimated to result in savings of nearly Rs 4 lakh crore. Given that even the stimulus cost would actually be lower than estimate and considering the possibility of an extension of spending curbs to Q4, the government still has considerable room for unveiling another round/s of stimulus, without altering the estimated budget size for the year or the enhanced gross borrowing limit of Rs 12 lakh crore.

Of course, given the huge revenue shortfall, even the current Budget size entails fiscal deficit close to double the budgeted level of about Rs 8 lakh crore, according to an FE analysis. As even the nominal GDP might contract in the year, the Centre’s fiscal deficit could be about 8% of GDP.

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