With India continuing its nationwide lockdown until at least May 3, there are growing calls for more fiscal stimulus as the economy plunges to its slowest growth in decades.
Steps taken so far to ease the economic fallout from the pandemic include a $22 billion relief package rolled out by the government after the stay-at-home directives first came into effect on March 25.
Now there is widespread speculation a further stimulus package will be unveiled by India's finance ministry in the coming days, as businesses and economic experts demand more action.
“Our analysis shows that a month of lockdown could shave off 10 trillion rupees (Dh480bn) of gross domestic product, or 5.3 per cent,” says Sunil Tirumalai, the head of research and strategist at Emkay Global Financial Services, based in Mumbai.
“We believe the required size of the stimulus package should be of this scale, and even then it would still be lower than the packages announced by other infected countries.”
There are constraints, however, on how much India, as a developing country, will be able to spend, analysts warn.
In reality, Mr Tirumalai says a government stimulus package “is likely to be much lower, in the range of 2tn to 3tn rupees”, as the country tries to keep its fiscal deficit in check.
India has one of the strictest stay-at-home regimes in the world, with people largely only permitted to go out for essential supplies. As a result, many businesses have temporarily shut, projects have ground to a halt, jobs are being cut and salaries trimmed, and millions of low-income labourers have been left without work.
On Tuesday, Indian prime minister Narendra Modi told the nation the stay-at-home directive was being extended until May 3 as the number of cases of Covid-19 continued to rise in the country, with more than 14,000 confirmed cases and 488 deaths as of Saturday morning, according to Johns Hopkins University.
Some relaxation to the measures will be introduced from Monday in areas not considered virus hotspots, with restrictions lifted on the movement of cargo, farming, and the construction of certain infrastructure projects. However, this will only marginally alleviate the economic woes, analysts say.
Sectors such as travel and hospitality have been particularly hard hit by the measures.
“While we support the extended lockdown, it has further diminished our ability and opportunity to bounce back in the post-covid era, apart from intensifying the risk of massive job loss in the sector,” says Anurag Katriar, the president of the National Restaurant Association of India and the chief executive of deGustibus Hospitality.
“We are banking on the government support to tide over this crisis as well as the announcement of a larger stimulus package for the industry post-lockdown.”
Although the restrictions are considered essential to combat the spread of the virus and avoid overwhelming the country's already overstretched public healthcare system, the cost to the economy of such a situation is extensive.
“The virus has come about at an inopportune moment in India, when the growth rate was already slowing,” says Rukshad Davar, a partner and head of the mergers and acquisitions practice at Indian law firm Majmudar and Partners. “It has accelerated that pace. A broad range of sectors have been impacted, including industrial manufacturing activity, trade, textiles, aviation and hotels.”
The International Monetary Fund (IMF) is forecasting India's GDP growth will come in at just 1.9 per cent in the current financial year, which started at the beginning of this month, as the IMF chief economist Gita Gopinath warned “this crisis is like no other”. The impact of India's lockdown along with the global economy being plunged into recession are weighing heavily on the country's growth prospects.
These levels are far lower than the annual growth of about 8 per cent India was targeting, as the country strives to become a $5 trillion economy by 2025.
The $22 billion relief package unveiled so far was largely aimed at the low-income segment of the population and included food and cash handouts. Last month, the Reserve Bank of India (RBI) eased monetary policy through a 75 basis point emergency interest rate cut and a three month moratorium on loans.
The RBI disclosed a new set of measures on Friday aimed at freeing up liquidity in the system. These included a 25 basis point reduction of the reverse repo rate – the rate at which commercial banks lend to the central bank. A $500bn targeted long term repo operation was also announced, designed to get cash flowing to non-banking financial companies (NBFCs), and funds for financial institutions including the National Bank for Agriculture and Rural Development, which could help businesses secure much-needed loans.
“Broadly these measures will strengthen the liquidity position of the NBFCs and corporates,” says Vishal Kampani, the managing director at Mumbai-based JM Financial Group, adding that it “signals a strong intent of the RBI to turn the wheel of the economy”.
But analysts says the money does not always find its way through banks to those that need it.
“Policy transmission remains a key challenge in India as excess liquidity is not benefiting all entities,” says Sonal Varma, the chief India economist at Japanese investment bank Nomura. “Smaller and lower-rated entities continue to see tight credit conditions due to their elevated credit risk premia in an environment of weak growth. Hence, while the RBI’s measures are a nudge to banks to close this gap – between the haves and have-nots – a bigger shove will be necessary to meaningfully reverse banks’ risk aversion.”
However, RBI governor Shaktikanta Das has left the door open for further interest rate cuts and more measures to be taken by the central bank to help the economy.
“The RBI will monitor the evolving situation continuously and use all its instruments to address the daunting challenges posed by the pandemic,” Mr Das said in a statement on Friday. “The overarching objective is to keep the financial system and financial markets sound, liquid and smoothly functioning so that finance keeps flowing to all stakeholders, especially those that are disadvantaged and vulnerable.”
While some investors were disappointed by the RBI's statement on Friday, they have pinned their hopes on a fiscal stimulus package from the finance ministry. Aid for small businesses is expected, as many face dwindling or no revenue during the pandemic.
“While the RBI has stepped up, the same cannot be said for the finance ministry,” says Shilan Shah, a senior economist at Capital Economics. “Unless fiscal policy is also loosened aggressively alongside monetary policy, there is a big risk the drastic economic slowdown currently underway morphs into an annual contraction in output and that the recovery is hampered. We fear that the humanitarian cost of the finance ministry’s inaction is also mounting.”
To help alleviate the situation for businesses, lobby group the Confederation of Indian Industry is calling for up to $300bn in stimulus from the government over the next 12 to 18 months.
But the Indian government needs to keep its fiscal deficit in check. Fitch Solutions estimates the Covid-19 impact could result in the fiscal deficit expanding to 6.2 per cent of GDP in this financial year, from the government's earlier estimate of 3.5 per cent, because of spending on economic stimulus. It says the government may have to resort to additional borrowing to fund the stimulus required.
“The trouble here is that India is bound by fiscal responsibility and budget management,” says Karan Mehrishi, the lead economist at Acuité Ratings & Research. “You can throw that concept out of the window given the current circumstances, but then you also have to deal with the situation where you can be downgraded by global ratings agencies.”
That would impact India's ability to attract investment going forwards.
The government could also consider other initiatives such as tax cuts and providing loans to companies, Mr Davar says.
But more broadly, there is still little visibility on the situation, which means it could be a long road ahead.
“It's just a guess as to how we would come out of this, given that the a big uncertainty as to when the [coronavirus cases] curve will flatten and ease off,” Mr Davar adds.
