What’s influencing the size of India’s Covid-19 relief stimulus?

The Indian government has been announcing successive rounds of stimulus measures to help various segments of the economy deal with the loss of income, business and liquidity caused by the Covid-19 pandemic. After the recent round of stimulus announced on November 12, the Finance Minister said that the total stimulus along with the measures taken by the RBI to impart liquidity amounted to ₹29.87 lakh crore, accounting for 15 per cent of the GDP.

How do the measures of the Indian government compare with the quantum of stimulus announced by other countries? A comparison is possible using the IMF’s fiscal monitor released in October. The IMF estimates that the value of fiscal measures taken by all countries amounted to $11.7 trillion, or close to 12 per cent of the global GDP, as of September 11, 2020. The fiscal actions were a mix of additional spending, revenue forgone — including temporary tax cuts — and liquidity support, including loans, guarantees, and capital injections by the public sector.

According to the IMF, India’s fiscal package until September 11, 2020, amounted to 7 per cent of the GDP with above-the-line measures or actual spending amounting to 1.8 per cent and an additional 5.2 per cent from below-the-line measures. This package compares well with most other emerging economies, including China, Russia and Indonesia, that have spent a far lesser sum as a per cent of their GDPs. But the advanced economies have had an advantage during the crisis.

Wealth of the countries helps: Countries with higher GDP per capita, or those that have more wealth, have been able to borrow more against that wealth without having to worry about bloating the public debt inordinately. Countries such as Germany. Singapore, the UK and Japan could spend over 20 per cent of their GDPs to fight the pandemic because of their higher per capita income.

Fiscal imbalance needs to be minded: The IMF is projecting that India’s fiscal deficit as a per cent of the GDP will expand to 13.1 per cent in 2020 and will continue to remain elevated at 11.8 per cent in 2021. Given the impact of the growing deficit on bond yields and the inability to monetise the deficit, India has to be mindful to not spend in a large way. While the fiscal deficit of countries like the US and the UK is projected to expand beyond 15 per cent of GDP in 2020, it is expected to be reined to singe-digit by 2021. India is, however, expected to find it more difficult to control the deficit given the lacklustre revenue growth in 2021.

Debt to GDP: Rating agencies tend to keep a hawk-eye on the public debt and had already flagged India’s growing debt as a concern in 2019. India’s government debt as a per cent of GDP is expected to increase to 89.3 per cent in 2020 and stay elevated in 2021. This high borrowing is likely to crowd out other corporate borrowers, increase supply of G-secs and spike yields. While the RBI has been using various tools to keep yields in check, it has its task cut out for the next couple of years.

Ability to print currency: The problem is that India cannot print currency and monetise its debt because the rupee is not as popular as the dollar, euro, yen or pound. Even if more of these currencies is printed, it will be absorbed due to their high international usage. But the increasing supply of Indian rupee will only lead to higher inflation here — an undesirable outcome.

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