Coronavirus: Scope For More Fiscal And Monetary Support In India, Says IMF’s Gita Gopinath
Gita Gopinath, chief economist at International Monetary Fund. (Photographer: Anindito Mukherjee/Bloomberg)

Coronavirus: Scope For More Fiscal And Monetary Support In India, Says IMF’s Gita Gopinath

India is one of two major economies, along with China, estimated to grow in the current fiscal, according to the IMF’s World Economic Outlook-April update.

The International Monetary Fund forecasts 1.9 percent real GDP growth for India in fiscal year 2020-21, and 7.4 percent growth in fiscal year 2021-22. This contrasts with other more conservative private estimates for growth in FY21, with some even anticipating a contraction.

That’s partly because India is yet to see as severe a health crisis as “we have seen in the U.S., Europe or Wuhan in China”, IMF’s Chief Economist Gita Gopinath said in an interview to BloombergQuint. And while she supported India’s lockdown and efforts to prioritise health and protect lives, she also struck a note of caution when saying she “assumes the situation on the ground is worse than what we are seeing currently”.

There’s a scope for further monetary and fiscal stimulus measures, she emphasised.

We’ve incorporated in our forecasts the support that’s obviously been done. We are also anticipating that there will be more monetary stimulus in the sense of rate cuts and other kinds of measures, and we also see scope for more being done on the fiscal side to support household.
Gita Gopinath, Chief Economist, IMF
<i>Refer <a href="https://www.imf.org/en/Publications/WEO/Issues/2020/04/14/weo-april-2020">here</a> for the full WEO report. For India, data and forecasts are presented on a fiscal year basis, and GDP from 2011 onward is based on GDP at market prices with fiscal year2011/12 as a base year.&nbsp;  </i>
Refer here for the full WEO report. For India, data and forecasts are presented on a fiscal year basis, and GDP from 2011 onward is based on GDP at market prices with fiscal year2011/12 as a base year. 

The IMF growth forecast factors in the monetary and fiscal measures announced so far by the Reserve Bank of India and central government.

Gopinath said she’s anticipating more monetary stimulus including rate cuts by the Indian central bank.

“In terms of the monetary policy, the support through liquidity, through dollar swaps and through encouraging lending to small and medium enterprises, I mean, all of these are important steps and depending upon what you see on the ground, you might see more action. The RBI has given forward guidance that they will do more, if needed,” she said.

The IMF April Fiscal Monitor urges India to consider more fiscal stimulus to sustain healthcare resources and the economy in the face of Covid-19 pandemic.

“In India, the fiscal stance should be eased as needed to accommodate necessary increases in public health expenditure in response to the pandemic and shield against a more severe economic downturn, using targeted and temporary measures. Once the current economic situation improves, a more ambitious, credible medium-term fiscal consolidation path is needed to bring debt and interest expenditure down. Transparency must improve, and the practice of shifting spending off-budget must be curtailed.”

It’s very clear that more needs to be done in India, in terms of fiscal stimulus, Gopinath reiterated, even if that meant a substantial expansion of the fiscal deficit. “Not just India, many countries are witnessing a rise in deficits and debt,” and India’s stimulus measures will be accepted in the same vein.

IMF is advising countries to spend what they need to, but “keep the receipts”. It’s very important to have clear accountability and transparency for the spending that’s being done, both on balance sheet and off balance sheet.
Gita Gopinath, Chief Economist, IMF

Downside risks to IMF’s forecasts are the biggest for emerging and developing economies, she cautioned.

Watch | Gita Gopinath In Conversation With BloombergQuint’s Menaka Doshi

Here are the edited excerpts from the interview:

India and China are the only two countries where you do not forecast a contraction in 2020 or FY21. Let me talk about India first. Is this based on the current level of virus spread in the country and the fiscal and monetary support, which is very marginal? Or have you factored in more in these forecasts?

GITA GOPINATH: So I mean, there are other countries too where it’s positive but if you look at the larger economies, you’re right that India and China are the ones with positive growth unlike the others.

Just a couple of things to say, I think one is what you mentioned, which is in terms of the severity of the health crisis. We’re not seeing the severity of health crisis as we see it in Europe, and in the U.S. and as we saw it in Wuhan in China. We’ve assumed, of course, that things would be worse on the ground than what we’ve seen currently.

So in terms of downside risks to our forecast, I actually think some of the biggest ones are for emerging and developing markets. Another thing to mention in the case of India is that its fiscal year numbers and not calendar year numbers, which is what we have for many other countries. So if you did calendar year basis, India’s number for 2020 would be 0.5 percent.

And this factors in the current level of fiscal and monetary support that’s come in? Because so far the government has announced a very tiny programme of support. Many of those measures are measures that were already existing schemes, except that they’ve advanced some of them. Are you anticipating more support?

GITA GOPINATH: We’ve incorporated in our forecasts the support that’s obviously been done. We are also anticipating that there will be more monetary stimulus in the sense of rate cuts and other kinds of measures and we also see scope for more being done on the fiscal side to support households.

Can you talk us through what your assessment of India’s response has been? Do you think that we currently run the risk of having done too little? There was a fiscal monitor report out by the IMF that said, in India, the fiscal stance should be eased as needed to accommodate necessary increases. What’s your view on how much we can at this point in time, relax the fiscal deficit and to what extent the Indian authorities should go to support the economy?

GITA GOPINATH: We strongly support the policies that are being done. I think number one priority is health and people’s lives, and the lockdowns are helping to contain the spread of the virus. There was a very quick response on this front and that’s very welcome.

At the same time when you’re in this phase, you have to ensure that people have their basic livelihoods. When it comes to daily wage workers, you saw migrant workers; you have to make sure that they have the support that they need, and also that the firms, especially small and medium enterprises are able to survive this crisis to restart again.

So on that front there has been spending on both people and on firms. We see scope for more being done, and I’m sure this is being considered in the next weeks. In terms of the monetary policy the support through liquidity, through dollar swaps and through encouraging lending to small and medium enterprises, I mean, all of these are important steps and depending upon what you see on the ground, you might see more action. I mean, the RBI has given forward guidance that they will do more, if needed.

Sure, but still I’d still like your views on how much more India should be doing. Should we be looking at deficit monetisation? Should we go that far or do you believe that the very targeted measures that the government has announced so far should continue to be the route that the government takes?

GITA GOPINATH: So, I’m being very clear by saying that more needs to be done, which means that we’re talking about more fiscal stimulus. To your question of whether that should be done through monetisation, that jumps the gun a bit because that assumes that the government is not able to borrow in domestic markets or international markets in any kind of reasonable rates, and that’s not the case for theIndian economy.

So, there is that space that exists, and we can actually see the kind of close collaboration that you’ve seen anywhere in the world—between monetary and fiscal policy to support the broad mandate of keeping unemployment low and economic activity in reasonable shape.

So, those kinds of measures are what I would expect to see. Monetisation is a last resort measure because it has some very negative impact on things like inflation expectations and on institutions, going forward. So, I think there’s a lot more that can be done before India gets there.

And you think that the world would look at maybe, let’s say, an expanded deficit by at least another 100-200 basis points if required, comfortably? Given the scope of this crisis and the impact on all nations.

GITA GOPINATH: This is a crisis that’s a global shock. Every country is experiencing it. It’s clearly a recognised exogenous shock for countries. So, India will be no different, which is you’re seeing a build-up of deficits and debts in many countries in the world. And again this is not something specific to India. So I think the treatment should be the same.

Now what is very important, and this is the advice we have given to all countries is, that do the spending that you need to do. Like [Vitor] Gasper just mentioned, do the spending you need to do but “keep your receipts”, which is very, very important at this time to have clear accountability of the spending being done, clear transparency of the spending being done, both on the balance sheet and off the balance sheet. So that one can tackle this once you’re past the peak of this crisis.

I have one last question and that has to do with China. The highest return to growth, you projected for 2021 is for China over 9 percent. Can you talk us through that estimate? Will it be a largely domestic market-driven growth? And I think implicit in my question also then is what kind of international trade recovery will we be looking at, maybe in 2021?

GITA GOPINATH: In the case of China, that’s the country where we’ve seen the biggest, strongest decline in cases. And most of the epicentre of it was in Wuhan and the severity of it wasn’t there in the rest of China. So they’re much quicker in the recovery phase, as opposed to other countries where the second quarter is going to be the worst for them this year. That’s one of the factors that plays into why we can see a little bit of a stronger recovery in China.

Second, is very strong fiscal and monetary policy support that’s in the system in China, and you can see China has the space to do more to aid the recovery. So because of all these factors, I think you’re right that we have one of the strongest recoveries projected for China. But again we’re not talking about returning to the pre-crisis level of economic activity. Secondly, as long as the rest of the world is in a lockdown, the spillover from negative global demand on China will also be significant.

Gita Gopinath also discussed the downside risks to IMF’s global forecasts and whether the monetary as well as fiscal responses from across the world will be sufficient in battling the economic impact of Covid-19.

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