India’s ‘mammoth’ COVID-19 package much smaller than it seems, says Fitch Solutions

PTI, May 19, 2020, 2:26 PM IST

New Delhi: The government’s Rs 20.97 lakh crore COVID-19 package lacks in addressing immediate concerns of the economy as the actual fiscal impact of the additional stimulus is only about 1 per cent of GDP as opposed to the claim of 10 per cent, Fitch Solutions said on Tuesday.

Prime Minister Narendra Modi on May 12 announced a stimulus package of Rs 20 lakh crore, or nearly 10 per cent of GDP, to deal with the economic fallout of COVID-19. The contents of the package were broad-based and announced in five tranches.

“About half of the package amount covers fiscal measures that had previously been announced and also include the estimated economic impact of monetary stimulus from the Reserve Bank of India (RBI),” Fitch Solutions said in a note.

The rating agency said a seeming reluctance for fiscal expansion by the central government amid the COVID-19 crisis in India also poses a significant downside risk to its 1.8 per cent growth forecast for 2020-21 fiscal.

“India’s economic crisis is growing increasingly dire due to surging COVID-19 infections and weak demand both domestically and externally. We believe that every delay to effective government stimulus will only deepen the downturn, which will eventually require even more spending to lift the economy out of the doldrums, which could see the deficit come in wider,” it said.

The new fiscal stimulus announced between May 13 and May 17 is “made up of the government loan guarantees, credit extensions to be led by banks, and regulatory amendments,” it said.

The new spending will only amount to about 1 per cent of GDP, which would take India’s total central government COVID-19 fiscal response to-date to only 1.8 per cent of GDP, it said.

“We see the package as being lacking in addressing the immediate concerns of the economy and have revised our central and combined deficit forecasts for FY2020/21 (AprilMarch) to 7 per cent and 11 per cent of GDP respectively, from 6.2 per cent and 9 per cent previously,” the rating agency said.

The package, it said, will not have a major fiscal and economic impact, despite the government’s claim of its ’10 per cent of GDP’ size.

Of the host of new stimulus measures, only about six — pension fund support, temporary tax cuts, farm infrastructure upgrades (if funds are quickly disbursed and projects rapidly executed), free food provision for migrant workers, funds to safeguard rural employment andan emergency fund for post-harvest activities — can be quantified as a fiscal stimulus with a near-term impact.

“Loan guarantees have been excluded as they will not have an immediate fiscal impact and will depend on other factors such as loan demand and bank propensity to lend,” it said.

Stating that it is skeptical of the efficacy of the announced measures despite the broad-based package, Fitch Solutions said the Government loan guarantees should technically aid credit flow to MSMEs through non-bank lenders.

However, this will only aid to stem business closures in the economy rather than support an expansion at this point. Moreover, confounding new rules on MSME definition which have both an investment and a newly introduced turnover limit will also hamper credit flow as businesses may fail to meet one or the other, rendering them ineligible for the MSME stimulus credit.

“Many of the announced schemes such as regulatory changes and vague reform plans also only target medium-term supply-side issues but fail to address immediate demand-side issues. As such, we expect further fiscal spending to be announced over the coming months, especially after India extended its nationwide lockdown by another two weeks to May 31, which would further impact economic activity,” it said.

The rating agency said central government revenues are likely to contract by 18.1 per cent in FY2020/21 due to repeated extensions to nationwide lockdowns amid a worsening COVID-19 outbreak domestically, and weak appetite for fiscal stimulus by the central government to lift the economic activity.

With the unemployment rate at over 20 per cent and a weak economic outlook both domestically and externally, both personal income and corporate income tax revenues will remain under severe stress over the coming quarters, it said.

While India is pushing to reopen its economy, Fitch said this is motivated by an urgent need to limit further economic hardship rather than an easing outbreak situation and infections could well accelerate after lockdowns are lifted, which would hamper the pace of economic recovery going forward.

Also, India’s debt-to-GDP will almost certainly surge as a result of this crisis as the government will have to fund its expenditures with increased domestic borrowing amid a revenue shortfall.

India’s combined government debt stands at about 70 per cent of GDP as of December 2019, of which central government debt is at 47 per cent of GDP.

An increased debt load will entail higher interest payments and this would divert even more resources away from more productive economic spending, and thus constrain India’s long-term growth potential, Fitch said.

“As opposed to other fiscal stimulus packages in the region, India’s package includes previously announced measures and also monetary stimulus, making the actual fiscal impact of the additional stimulus only about 1 per cent of GDP,” according to Fitch estimates.

The stimulus includes positive reform efforts, loan guarantees, and other measures that will be somewhat supportive of the Indian economy during the crisis and over the medium term.

“The frugal fiscal crisis intervention will likely impede a rapid economic recovery and accordingly, tax revenues, and we are revising our FY2020/21 (April-March) central fiscal deficit forecast to 7.0 per cent of GDP and overall fiscal deficit forecast to 11.0 per cent of GDP,” it added.