India Expands Stimulus to 15% of Economy as Recession Looms
A worker wearing a protective mask operates a tape cutting machine in a factory in Sonipat. (Photographer: Prashanth Vishwanathan/Bloomberg)

India Expands Stimulus to 15% of Economy as Recession Looms

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India increased stimulus measures to rescue companies and save jobs in an economy clobbered by a sudden lockdown in March to stem the coronavirus pandemic.

The additional stimulus steps amount to about 9 trillion rupees ($120 billion), taking the nation’s total virus relief to almost 30 trillion rupees, or 15% of gross domestic product, Finance Minister Nirmala Sitharaman told reporters in New Delhi Thursday. That equals the total spending envisaged in the government’s budget for the year to March.

India Expands Stimulus to 15% of Economy as Recession Looms

Asia’s third-largest economy slipped into an unprecedented recession after GDP probably declined for a second straight quarter in the three months ended September, according to a Reserve Bank of India report based on high-frequency data. The latest measures are an extension of a rescue plan announced in May, although that’s done little to revive demand in the economy heavily reliant on consumption.

Micro-, small- and medium-sized businesses across 26 sectors will be eligible for a credit-guarantee program, and will get a one-year moratorium on loans and four more years to repay the amount, Sitharaman said.

She counted a production-linked incentive program worth 1.46 trillion rupee ($20 billion) for manufacturing units, already approved by the government, as part of 12 support measures unveiled Thursday. An additional outlay of 180 billion rupees will be made toward an affordable urban housing program, she said.

Other key measures:
  • Some income tax relief to real estate developers and buyers
  • Government to infuse 60 billion rupees in infrastructure debt platform
  • Offers retirement fund subsidies to companies adding new jobs
  • 650 billion rupee being provided to ensure supply of fertilizers

The actual fiscal cost for the government may be much less, according to economists including Standard Chartered Plc’s Kanika Pasricha.

​While the headline fiscal impact will be around 1.3% of GDP, it includes 0.7% for the incentive program whose expense is spread over five years. That limits the net cash outgo for the current financial year, she said.

“We believe the government will continue its calibrated approach towards relief and stimulus measures given the fiscal constraints,” said Shubhada Rao, founder at QuantEco Research in Mumbai. “We do see economic activity posting a better than earlier anticipated flat to marginal positive growth” in the quarter to March.

The stimulus comes at a time when Modi’s government doesn’t have the money to pay even states their share of a nationwide sales tax. Revenue collections have been hurt by the lockdown, which brought economic activity to a near standstill during April to June and caused a record 24% contraction in GDP during the period.

The economy probably contracted 8.6% in the next three months ended September, the RBI’s Nowcast report showed. Although that’s milder, the virus pandemic remains a risk for the nation’s outlook.

While India’s daily new infections have slowed, the country is the second-worst affected nation after the U.S., with over 8.5 million cases.

India Expands Stimulus to 15% of Economy as Recession Looms

The International Monetary Fund sees the South Asian nation now facing the biggest contraction of major emerging markets, with GDP forecast to shrink 10.3% in the year to March -- worse than the 4.5% decline it predicted in June.

Still, high-frequency indicators, including exports, automobile sales and manufacturing output, have shown strength in recent months amid an uptick in consumption. Higher disposable incomes with farmers, thanks to bountiful rains and record crops, have helped boost demand in the hinterland.

“Recovery is happening,” Sitharaman said, pointing to some high-frequency indicators. “It is just not pent up demand.”

©2020 Bloomberg L.P.

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