IMF’s Gita Gopinath Says India Has Scope For More Fiscal Stimulus Despite Constraints
International Monetary Fund’s Chief Economist Gita Gopinath has called for a more direct fiscal support and additional monetary easing to help India recover faster from the pandemic-induced economic slump.
The lockdown imposed at the end of March to contain the coronavirus caused Asia’s third-largest economy to contract 23.9% in the April-June quarter. IMF now expects gross domestic product to shrink 10.3% in the fiscal year ending March 2021, far worse than the 4.5% decline predicted in June.
While Gopinath acknowledges the fiscal constraints faced by countries like India when compared to advanced economies, she said there’s “scope to do more".
India has deployed about 7% of its GDP in fiscal measures, she said in an interview with Quintillion Media’s Sanjay Pugalia, but it’s been mostly to help with liquidity in the form of lending support and credit guarantees. She pegs direct spending by the government much lower, at around 2% of the GDP.
What we are seeing around world is that these direct support measures—which put income in the hands of low-income households or into SMEs— seem to have a much bigger impact in terms of bringing back a faster recovery.Gita Gopinath, Chief Economist, IMF
The IMF recommended a more direct fiscal stimulus in India, expanding to both urban poor and rural migrant workers, in addition to the public investments already announced that can help create jobs.
There is also scope for more monetary easing by the Reserve Bank of India, according to Gopinath, especially after the current inflationary spike eases, "some of which will be transitory because there's still very low levels of overall demand.”
In the absence of additional stimulus, IMF expects India’s per capita GDP to rebound to pre-Covid levels only by FY23.
According to the Washington D.C.-based Bretton Woods institution, India’s per capita GDP is estimated to fall to $1,876.5 in FY21 from $2,097.78 in the previous fiscal. That will take it below the estimate of nearly $1,888 for Bangladesh.
IMF, however, sees India's per capita GDP surpassing its neighbour's to $2,030.62 in FY22, and $2,195.14 in FY23. But the gap with peers like Indonesia and China will only widen.
“There is a recovery that has started in India after the very deep collapse in the April to June months,” Gopinath said. “But again, we're starting from a low base—when you're reopening, you will see a recovery.”
The question is: When will you get back to 2019 levels? That, in our view, will take well beyond 2021.Gita Gopinath, Chief Economist, IMF
Watch the full conversation here: