Economy Watch

In Tax

Economy Watch provides an in-depth review of salient developments in India’s macroeconomy and economic policy in a global context.
It has established itself as a thought leadership publication, providing valuable inputs for policymakers in the central and state governments, academicians, industry and businesses and other stakeholders.

Related topics Tax

Economy Watch was launched for public distribution soon after demonetisation in December 2016. Since then, nearly 40 issues have been published.

It covers various macro-fiscal dimensions of the Indian economy including growth, inflation, government finances, external trade, monetary and financial sectors. It places India in a comparative economic framework using selected developed and developing countries.

Two innovative indices have been developed to capture changes in aggregate demand and macroeconomic imbalances in the Indian economy. The analysis in the Economy Watch is based on monthly, quarterly and annual data sourced from national and international sources.

Every month, a focused theme of contemporary economic importance is identified for a deep and insightful analysis which provides useful inputs and recommendations.

Strengthening of stimulus measures may arrest India's contractionary momentum

Key highlights from June 2020 edition:

Many multilateral bodies, financial institutions and rating agencies have reassessed their position regarding India’s growth prospects in FY21. Most of these bodies are now projecting a sharp contraction in India’s FY21 GDP. The IMF sharply revised down its earlier growth projection of 1.9% for India by 6.4% points to (-)4.5%. The World Bank forecasted India’s FY21 real GDP to contract by (-)3.2%, a downward revision from its earlier growth forecast of 2.2% (released on 12 April 2020), indicating a downward revision of 5.4% points. The ADB revised even more sharply, its earlier projection of 4.0% to (-)4.0%. The OECD also projected India’s GDP to contract by (-)3.7% in the single hit scenario and by (-)7.3% in the double hit scenario, where single hit scenario assumes an avoidance of a second outbreak which is factored in the double hit scenario.

It is notable that the revisions undertaken by the IMF, World Bank, OECD and ADB with respect to India’s growth projections have come after the announcement of the stimulus packages by the RBI and the Ministry of Finance (MoF) in several tranches over the period from end-March 2020 to date. The main stimulus announcements by the MoF came in mid-May 2020.

Policymakers in India are constrained in terms of offering larger stimuli because of a number of India-specific challenges. Two challenges are particularly notable. First, India has entered the COVID-19 crisis on the back of a continuing economic downslide. In the first month of the new fiscal year, that is April FY21, center’s GTR contracted on a y-o-y basis by (-)44.3% as a result of a contraction of (-)10.0% in direct taxes and a contraction of close to (-)70% in indirect taxes. Despite this shortfall in revenues, the central government sustained a growth of 20.6% in total expenditure primarily on account of revenue expenditure. Capital expenditure, in fact, was allowed to contract by (-)7.5%. In order to generate higher multiplier impact of an increase in government expenditure on growth, a sharper increase in government capital expenditure viz.-à-viz. revenue expenditure is required during the course of the year. It is not only the size of the fiscal stimulus but also its composition in terms of low multiplier expenditures (revenue expenditures) viz.-à-viz. high multiplier expenditures (capital expenditures), which matters. 

Moreover, the pace of contraction in power consumption on an y-o-y basis has reduced incrementally from (-)25.0% in April 2020 to (-)18.4% in May 2020 and further to (-) 9.4% during the first thirteen days of June 2020. There was a pick-up in the automobile sales at the factory level reflected by an increase in passenger vehicle sales to 37,000 in May 2020 as compared to zero in April 2020. Exports continued to contract by (-) 36.5% in May 2020, although at a slower pace as compared to (-) 60.3% in April 2020. India’s foreign exchange reserves reached a record high level of US$508 billion in the week ending 12 June 2020, rising from US$476 billion in end-March 2020.

A second round of fiscal stimulus in the latter part of the fiscal year may help arrest the strong contractionary momentum in the Indian economy. There is also scope to further reduce the repo rate.

Click here to download the latest issue

Contact us

Like what you’ve seen? Get in touch to learn more.