Girls in protective masks wait to pray inside the temple premises on the occasion of the annual Onam harvest festival, amid the spread of the coronavirus disease (COVID-19), outside Kochi, India, on 31 August 2020.
Sivaram V | REUTERS
SINGAPORE – Economists were unimpressed by India’s latest economic stimulus aimed at boosting domestic demand by around 730 billion rupees ($ 9.94 billion), with some questioning whether the new measures can spur long-term growth. term.
The Finance Ministry introduced several measures on Monday with the aim of stimulating consumer spending and bolstering demand in the pandemic-hit economy that saw a 23.9% drop between April and June.
“The amount of demand stimulus is disappointing and we consider the impact on … growth to be quite limited,” according to a note from Nomura on Monday.
“With previous rounds of budget fiscal support around 1% of GDP, today’s demand stimulus measures bring total fiscal support (within budget) to around 1.2% of GDP, which is small in comparison. with the size of the growth impact, and reflects India’s weak fiscal starting position, “said Nomura’s chief economist for India and Asia, former Japan, Sonal Varma, and Indian economist Aurodeep Nandi.
They explained that the government’s reluctance so far to announce the fiscal stimulus was guided by concerns that the ongoing blockade restrictions would weaken the effectiveness of those measures to generate more economic output.
I think the government’s focus on being obsessed with trying to provide stimulus to the economy to increase demand, we know it’s not really going to work.
“Like its previous fiscal measures, the government has continued to prioritize fiscal prudence and the actual impact on growth is likely to be modest,” Varma and Nandi wrote.
Aditi Nayar, chief economist at credit rating agency ICRA, Moody’s Indian subsidiary, said the new schemes will result in a temporary boost to consumer confidence and economic activity “with a sharper rebound in sales from the US. festive season that would later disappear. “
Economists have said that New Delhi has little room to increase stimulus without worsening the fiscal deficit. But given current economic conditions and weak revenue collection, the government’s fiscal deficit remains above its annual target and is expected to remain so throughout the year.
The government reportedly said there will be no changes to its loan program for the current fiscal year, even after announcing the stimulus measures on Monday. That means the government may have to cut spending elsewhere to fund new programs that would ultimately have minimal impact on stimulating demand, economists said.
What was announced?
Finance Minister Nirmala Sitharaman said in a statement that there were signs “that the savings of government and organized sector employees have increased and we want to encourage these people to boost demand for the benefit of the less fortunate.”
The measures include a scheme in which central government employees can spend their travel concessions tax-free on certain goods and services. Another program allows them to receive a portion of their salary in advance to spend on the festival of their choice before the end of March next year.
Also on Monday, New Delhi announced an additional 250 billion rupees ($ 341 billion) for capital expenditures on roads, defense, water supply, urban development and domestically produced capital goods. It also said that it will offer 120 billion rupees in 50-year interest-free loans to state governments for infrastructure spending before the end of the fiscal year on March 31, 2021.
Income support needed
What India needs right now is income support so that when the infection becomes more manageable and restrictions are lifted, consumers and businesses have the financial stability to borrow and invest, according to Jahangir Aziz, chief economics officer at JPMorgan Emerging Markets.
If households, small and medium-sized businesses and corporations have damaged balance sheets when the economy fully opens, banks are unlikely to lend them investment money when they need it, “Squawk told CNBC on Tuesday. Box Asia “. .
“I think the government’s focus on being obsessed with trying to provide a stimulus to the economy to increase demand, we know it’s not really going to work,” he said. “If infection rates increase, if there is social distancing, it is not possible that demand will increase.”
India is the second most affected country in the world and has more than 7.1 million reported cases of coronavirus infections and more than 109,000 deaths so far.
There is concern that there may be a rebound in the coming weeks and months as the holiday season approaches and people tend to gather in large crowds at places of worship and shopping malls.
“It can, (by) providing a sufficient amount of income support, preserve balance sheets. So when the economy opens up, maybe in the second half of 2021, we don’t have a problem where the economy gets stuck. and paralyzed by the fact that banks become risk averse and do not make loans to people with damaged balance sheets, “Aziz said. He explained that India will likely face a scenario in which damaged balance sheets and rising bad debts will slow the recovery.
“That’s where the government got it wrong. What is needed now is a lot of revenue support and we have seen countries that do it, that have done it,” he added, referring to Brazil as an example.
Economists agree that, for the time being, the Reserve Bank of India will likely have to do the heavy lifting to get growth back on track. But, with inflationary pressures looming in the economy, the central bank is unlikely to cut rates further until next year, they said.
Last week, the RBI kept its main buyback rate unchanged at 4%.
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