With buoyant high frequency indicators, India looks forward to a positive 3QFY21 economic growth

Stimulus 3.0 is well-timed but quite modest

On 12 November 2020, the latest round of stimulus was announced by the Government of India, amounting to INR2.65 lakh crores, that is about 1.4% of the FY21 nominal GDP projected by the IMF. Coming a few days ahead of Diwali, while the economy has now nearly fully exited from the lockdown, this stimulus injection was clearly well-timed. The focus of this package was mainly sectoral, covering telecom and networking products, automobiles and auto components, domestic defence equipment, pharmaceuticals and drugs, advance cell chemistry battery, food products, and textile products. Further, there was an emphasis on rural and agricultural sectors, housing, real estate, industrial and overall infrastructure sectors. These sectors are employment-intensive with high multipliers. There is already a pent-up demand in the system, and it is only appropriate that this package has focused largely on the supply side of the economy. If some of the supply side bottlenecks can be successfully overcome, it will help not only stimulate growth and employment but also keep inflation in check.

While the direction and sectoral allocation of the latest stimulus appear to be well-considered, the success of such a package depends on its overall magnitude and implementation efficacy. The estimated amount of INR2.65 lakh crores is derived by mixing current and future expenditures. For instance, the amount of INR1.46 lakh crores allocated for the Atmanirbhar manufacturing production-linked incentive (PLI) scheme is to be spread over a period of five years as per information available from the press release approving this scheme dated 11 November 2020. The impact of this PLI scheme in the current year, therefore, is bound to be a small fraction of the total allocated amount. Similarly, the indicated amount of fertilizer subsidy support of INR65,000 crores should be considered in view of the fact that the budgeted amount in FY21 for this subsidy was INR71,309 crores. There is no clarity whether or not the estimated amount of INR65,000 crores are an additionality over the budgeted amount. Although it is indicated that the demand for fertilizer is expected to increase, the extent of subsidy would also depend on the movement of global crude prices which are expected to remain quite low. It is notable that the global crude prices averaged US$58.6/bbl. in FY20. In comparison, these have averaged only US$36.7/bbl. during April to October 2020 in the current fiscal year. As such, the genuine additionality of the proposed stimulus may be much less, perhaps, much lower than 1.0% of estimated FY21 nominal GDP.

One important issue relates to the financing of this package in the current year. The center has maintained that it will adhere to its revised borrowing program amounting to INR12 lakh crores. As per the CGA, in 1HFY21, center’s gross tax revenues contracted by (-)21.6% over the corresponding period of last year. Non-tax revenues of the center also showed a massive contraction of (-)55.9% during 1HFY21. During this period, center’s revenue expenditure showed a subdued growth of 1.0% while capital expenditure contracted by (-)11.6%. Together, these have resulted in a small contraction of (-)0.6% in center’s total expenditure. In 1HFY21, center’s fiscal deficit stood at 114.8% of the annual budgeted target as compared to 92.6% during 1HFY20. Fiscal deficit of the center grew by 40.3% during April-September FY21 as compared to 9.6% during the corresponding period of FY20. Despite the substantive rise in the magnitude of center’s fiscal deficit in 1HFY21, a contraction in center’s total expenditure indicates that almost the entire increase in fiscal deficit has been utilized in making up for the shortfall in center’s tax and non-tax revenues.

With CPI inflation remaining high, next round of monetary stimulus may be delayed

Headline CPI inflation at 7.6% in October 2020 breached the upper tolerance limit of 6% for the seventh successive month, led by supply chain disruptions and higher taxes on petroleum products, although global crude prices remained subdued. Average global crude price fell to US$39.9/bbl. in October 2020 from US$40.6/bbl. in September 2020 due to a resurgence of Covid-19 cases in north America and Europe thereby dampening demand. The World Bank (Commodity Markets Outlook, October 2020) has projected the average global crude price at US$41/bbl. in 2020 and US$44.0/bbl. in 2021. The Monetary Policy Committee (MPC) in its forthcoming meeting during 2 to 4 December 2020, will examine whether the next repo rate reduction is called for to support the ongoing fiscal stimulus initiatives. However, given the rigidity of CPI inflation well-above the upper tolerance limit of 6%, the MPC may decide to wait for some more time.

Global growth prospects and challenges to India’s exports

With the second wave of Covid-19 pandemic spreading rapidly across Europe, several countries have now resorted to re-imposition of lockdowns. The US has also been showing a significant upsurge in the incidence of Covid-19. While countries including UK, France, Germany and Czech Republic have imposed strict nation-wide lockdowns, Italy, Spain, Belgium, Portugal, Ireland, the Netherlands, Greece and Denmark have imposed partial lockdowns or other forms of restrictions including curfew. Consequently, external demand continues to remain anaemic as reflected in a (-)5.1% y-o-y contraction in India’s exports during October 2020. India chose to opt out of the RCEP agreement which was signed by fifteen Asia-pacific countries on 15 November 2020. India has instead chosen to raise import tariffs while incentivising domestic production thereby protecting Indian industry as well as fostering competitiveness. Further, India may need to consider diversification of its exports away from members of the RCEP.

Covid-19’s anticipated debt shock

In the In-Focus section of this issue, we have highlighted the Covid-19 led upsurge in the indebtedness of G-7 countries plus India and China (G-9 countries), comparing it with the impact of the 2008 global economic and financial crisis. We estimate that Covid-19 induced upsurge in government debt-GDP ratio for the G-9 countries would amount to 20.6% points on average. As such, it would be about 97.4% higher than the increase of 10.4% points resulting from the 2008 crisis.

For assessing the impact of Covid-19, we have projected the government debt-GDP ratio for 2020 and 2021 using the 2019 debt-GDP ratios along with independently projected fiscal deficit and growth and inflation rates. We have indicated that the substantive upsurge in the government debt-GDP ratio is because two of its three determinants namely, fiscal deficit and negative growth supplement each other in a pandemic year leading to an increase in the government debt-GDP ratio. There is thus a policy trade-off in dealing with the pandemic. A higher fiscal deficit within a country could be justified if it can minimize the contraction in its growth rate. Furthermore, there is a case for coordination amongst major economies of the world in implementing their fiscal stimuli. It would be timely to coordinate such effort along with the introduction of the Covid-19 vaccine.