India can spend $18 billion to fight coronavirus impact, say analysts

Bloomberg March 23 | Updated on March 23, 2020

India is facing an economic shock as many parts of the country go into lockdown and the government will have to spend more and abandon fiscal deficit targets to cope, analysts said.

Growth may weaken to 3 per cent in the first three months of this year from 4.3 per cent estimated previously, according to Oxford Economics, while Jefferies sees room for the government to spend $18 billion to support activity. Still, in ANZ’s view expansion is set to remain weak over the next few years.

The readings about Asia’s third-largest economy come as policy makers are focused on ensuring Indians have cash in hand to buy essentials as more cities are locked down to prevent the spread of the virus, and countries around the world race to ease fiscal and monetary policies to shore up their economies.

The following are comments from economists watching India.

Fiscal room

Mahesh Nandurkar and Abhinav Sinha at Jefferies note that if the government expands the fiscal deficit target by 1 percentage point, it will create $18 billion of spending on a net basis, the analysts wrote. The budget shortfall is targeted at 3.8 per cent of gross domestic product in the current year and 3.5 per cent in the year starting April 1.

The spending would include cash handouts of ₹5,000 ($65.8) a month for 50 million workers for a quarter. That would entail an outgo of Rs 75,000 crore. And also likely forgo some revenue on account of goods and services tax cuts possibly on automobiles and durables.

They point out other ways to help the economy is by interest payment deferrals or waivers to small business as well as additional spending on infrastructure projects and housing. Additional policy measures could include relaxation of non-performing loan rules and provisioning norms for banks.

Economist Abhishek Gupta says that going by the size of fiscal aid unveiled by other governments around the world, we believe the Indian government needs around at least 1 per cent of GDP in fiscal aid to meaningfully respond to the virus outbreak. That amounts to roughly $30 billion of aid. This should push the government’s budget deficit for fiscal 2021 up to a minimum of 4.5 per cent of GDP, 1 ppt above its 3.5 per cent target.

Slowdown streak

While the economy was showing signs of turning a corner in the first two months of the year, Priyanka Kishore, head of India and Southeast Asia Economics at Oxford Economics, sees the virus wiping out any chances of an economic recovery in the near term.

We estimate that this could hit first-quarter 2020 GDP to the tune of $6.5-$7 billion and lower our first-quarter growth estimate to 3 per cent year-on-year from 4.3 per cent earlier, she said. A substantial downward revision to our full-year forecast is also likely.

Prolonged pain

On balance credit and GDP growth are set to remain weak over the next few years, Richard Yetsenga and Sanjay Mathur at ANZ wrote in a note. In fact, we believe the Indian economy has fallen into a complex feedback loop which will be difficult to exit. The crisis is chronic.

A growth slowdown is likely to lead to more bad loans as companies fall behind on servicing their loans. That’ll be bad timing for the economy struggling with a shadow banking crisis, which in turn has crimped domestic consumption.

Earlier this month, the Reserve Bank of India put a moratorium on the fourth largest private bank, Yes Bank Ltd, leading to more dislocation and tightening in credit markets.

Published on March 23, 2020

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