While developed countries have been quick to launch epic fiscal packages to counter the economic devastation caused by the Covid-19 pandemic, more fiscally-constrained emerging economies have been more hesitant to do so. India is among the first in this group to break ranks. On Tuesday, amid a national lockdown, Indian Prime Minister Narendra Modi announced a 20 trillion rupee (about S$376 billion) fiscal stimulus, equivalent to more than 10 per cent of the country's gross domestic product (GDP) and the biggest in its history. It will be accompanied by "bold reforms" in land, labour, liquidity and loans. With the government having earlier released a smaller fiscal package of 1.7 trillion rupees - comprising mainly of income transfers to the poor - and with the country's central bank having provided about 5 trillion rupees in liquidity support, this means that the additional expenditure in the latest package will amount to at most 13 trillion rupees. This is sizeable.
But whether it will be sufficient to adequately cushion India's US$2.7 trillion economy from the stresses that have deepened since the country's seven-week lockdown is moot. On Wednesday, India's Finance Minister Nirmala Sitharaman started releasing the details of the latest fiscal package. Many of these centred on aggressive support for the country's micro, small and medium-sized enterprises (MSMEs), which are the backbone of India's corporate sector, accounting for almost one third of GDP and employing around 150 million people. India's MSMEs will get guaranteed collateral-free loans as well as equity infusions. There was relief for India's non-bank financial companies, the real-estate sector as well as contractors and suppliers to public projects. Individuals were given tax reliefs as well as extensions for filing returns.
Initially well received by India's business community and stock markets, these measures will go some way towards helping companies to at least partially resume operations once the lockdown eases. However, uncertainties still abound. One relates to how soon the millions of migrant workers will return to work from their villages - companies face not only financial constraints but also labour shortages. How the government will fund the fiscal package is still unclear, as are what labour and land reforms will accompany it and what the reaction to those reforms will be.
How credit rating agencies will react to a blowout of India's fiscal deficit is also uncertain - which would be a problem for other emerging economies as well. Rating downgrades will lead to higher borrowing costs. But India has no choice but to take such risks if it is to avoid an economic meltdown. Even so, the fiscal boost, as bold as it is, is unlikely to enable India to avoid negative growth this year, and what may be its worst recession since independence in 1947.
