The Indian Covid response package combines short-term macro policy with long-term structural reforms, and at around 5% of GDP, one of the largest in the world
Ever since Covid-19 forcefully entered the world in February 2020, speculation has mounted that it will change policies, and lives, possibly forever. At least one Covid case has been observed in over 200 countries—if ever there was a pandemic, we are looking at it. Countries have been forced to take extra-ordinary steps to counter this inhuman invasion. The economic steps are oriented toward avoiding a meltdown, and India has not been an exception.
On May 12, PM Modi gave a call for a Self-Reliant India Movement with five pillars—economy, infrastructure, system, vibrant demography, and demand. Subsequently, and spanning a week, the PM-FM duo unleashed a set of stimulus measures for the immediate short-term, and, for the medium term, a set of long-pending reforms in agriculture, labour, and industry.
The conversation in India has revolved around the size of the fiscal package—for a change, practically everyone is arguing that we have more fiscal space and the government (especially, as per the critics) is being heartless by not spending more. But, this is a mistaken view, not grounded in the reality of IMF data. As part of a data and information response to the Covid-19 pandemic, IMF has started publishing a Policy Tracker (IMF-PT) (bit.ly/2ZOrIGH) that reports on fiscal and monetary policy stances, and responses, for 193 countries.
According to IMF-PT, the fiscal component of the Indian package is estimated to be at least 3.5% of GDP as expenditure for poor households, migrant workers, and agriculture. There is an additional 0.5% of GDP for states to spend unconditionally, bringing the fiscal package—excluding loans—to businesses to be at least 4% of GDP. The support for businesses (MSMEs) is estimated to be 2.7% of GDP. Of this, at least 2% of GDP is in the form of 100% credit guarantees, and equity infusion.
Among major developing economies, only Brazil (8% of GDP), and Peru (7% of GDP) have a higher fiscal stimulus than India’s 5%+ level. The Brazil estimate includes about 3% of GDP as working capital loans to businesses and households. The fiscal support level for some important emerging economies: China 2.5% of GDP, and Indonesia 3.5%.
While comparing fiscal stimulus packages across countries, it is important to understand that such packages are in the nature of additional spending and tax reliefs, which can work directly through aggregate demand or indirectly by mitigating risk and enhancing access to funds (if they are in the nature of credit guarantees to financial institutions and non-financial enterprises). A large number of fiscal stimulus packages announced by different countries contain credit guarantees to financial institutions, SMEs, and agriculture—hence, it is difficult to segregate fiscal stimulus into its pure and impure components.
To put fiscal into perspective, the average of all fiscal measures in G24 developing economies is equal to 3.6%. No matter how the calculation is done, India is a positive fiscal stimulus outlier; by IMF-PT calculations, the stimulus is close to the largest among major emerging market economies (EMEs).
The rich nations are spending more; they can afford to. Japan announced what may be the upper limit to the expansion—21.1% of GDP. However, this includes large elements of loans and credit guarantees. Through a combination of several fiscal measures (tax deferrals, credit guarantees, etc) the US has pledged close to 13% of GDP. The EU, on average, has pledged 4% of GDP, with Germany and France each close to this estimate. The average for advanced countries is around 6% of GDP.
Notwithstanding the absolutely and comparatively large fiscal package, a perusal of most Indian newspapers and critics paints a different picture than that contained in IMF-PT. Several experts have contended that the fiscal stimulus is very low. As proof, it is stated that the fiscal deficit will expand by 0.8-1% of GDP—hence, the stimulus is very low! In contrast, most economists, and international organisations, recognise that fiscal stimulus consists of both the pure and impure components, and include three broad items—direct “above-the-line” component, a “below-the-line” component, and guarantees of various forms (primarily credit). The choice of using only one component of the fiscal stimulus is selective, and highly inappropriate.
It was not so long ago (September 2018 through February 2020) that critics (the same individuals/organisations who are critics today!), were arguing that the government, and RBI, were being heartless, economic-less, and clueless, by not addressing the MSME problem. This problem is now being addressed via 100% credit guarantees and fund infusion, and yet being ignored by the critics.
It is also the case that monetary policy change in India is quite significant, and the transformational impact of this monetary stimulus is not being recognised. As a long-time proponent of internationally competitive monetary policy, i.e., real interest rates comparable to those prevalent in competitor economies, the change brought about by RBI under the leadership of Governor Shaktikanta Das is truly welcome. The repo rate now stands at 4%, some 250 ppt below September 2018, and with well contained inflation (around 3-4%). This is substantially a much different, and much improved, RBI response than that which occurred in 2008-09. At that time, as a monetary counter to the Global Financial Crisis, RBI reduced the repo rate by 425 basis points to 4.75%. This was done over seven months, October 2008 to April 2009, and the prevailing CPI inflation rate was 10%.
India has pole position in another dimension of its response. It has announced several economic reforms as a part of the 10.5% stimulus package. These are long-awaited, and even longer debated, reforms—freeing up of the labour market, allowing farmers to sell their produce and land to who they choose, removal of archaic laws like the Essential Commodities Act, with the promise of more to come.
This is not an empty promise—the central government will advance another 1.5% of GDP for states to expand spending. This advance will be conditional on them undertaking long-pending reforms in areas such as distribution of food to the poor (one nation one ration card), power distribution, reforms in property tax collection, rational water charges, and ease of doing business initiatives. The Indian fiscal package is reformist, well-disciplined, and provides focused support; and, if needed, there is still room for additional measures.
Besides India, fundamental economic reforms have not been part of the Covid-19 policy response. Some distance away from India (and the only other example) is Indonesia, with a stated permanent reduction of the corporate income tax rate from 25% to 22% in FY21, and 20% starting in 2022.
There is an old saying about India and investment: “Many a woman has been found six-feet under because she bet on India doing the right thing”. However, this time it is really different—and a large wager is merited. PM Modi has used the crisis to reorient India towards its long-awaited destiny.
Executive Director, IMF, representing India, Sri Lanka, Bangladesh, & Bhutan. Views are personal