After a case emerged in Delhi, triggering a panic scenario, Indians wait up at a COVID screening station at Ram Manohar Lohia Hospital (RML) in Delhi, India, on March 4, 2020. Getty Images | Imtiyaz Khan | Anadolu Agency India has announced a host of initiatives worth 6.3 trillion rupees ($84.9 billion) aimed at improving the Covid-stricken economy, but many doubt it would have a significant influence on short-term growth. These actions, which amount to around 2.8 percent of GDP, are estimated to have a minor influence on the country’s fiscal deficit target. Economists have pointed out that the majority of the assistance is in the form of loan guarantees, rather than direct stimulation such as checks delivered to households. Furthermore, some of the actions had been announced previously and had already been considered into estimates. India’s budget deficit target for the current fiscal year, which ends in March 2022, is roughly 6.8% of GDP. The difference between a government’s income and spending is known as a fiscal deficit, and it indicates that the country is spending more than it earns. “While the headline impact of the announcements is significant, much of it was credit guarantees, resulting in a lesser net impact on the fiscal math,” said Radhika Rao, an economist at Singapore’s DBS Group, in a note on Tuesday. She explained that some policies, like as subsidies, free food grains, and support for children’s health, might have a significant influence on the fiscal deficit. However, a higher nominal GDP and a likely reprioritization of existing spending could provide “some wiggle space” to avoid surpassing the fiscal deficit objective. What was the announcement? Finance Minister Nirmala Sitharaman announced a slew of support measures on Monday, including the granting of $35 billion in loan guarantees to aid small businesses and industries hit hard by the pandemic. Sitharaman stated that the government will increase lending to firms in industries such as health care, tourism, and others by 1.1 trillion rupees ($14.8 billion). The government would also increase the size of the emergency credit line guarantee scheme from 3 trillion rupees to 4.5 trillion rupees, an increase of 1.5 trillion rupees ($20.2 billion). The program permits banks and non-bank lenders to provide emergency loans to qualified borrowers in order to help them run their enterprises, with the loans being guaranteed by the government, which protects lenders from default risks. When it was first implemented, the initiative was considered as a boon to India’s micro, small, and medium companies, which have been impacted hard by the pandemic. In addition, India established a credit guarantee scheme for microfinance banks, which often lend to the country’s smallest borrowers, such as small business owners. The government will spend an additional $12.6 billion till November to distribute free food grain to millions of people. promoting growth Rao told CNBC by email that the latest assistance measures were similar to how the government responded to India’s first wave of coronavirus epidemic last year. She said Monday’s announcement intended to improve credit flow to the worst-affected sectors and vulnerable households. “The fiscal push is primarily on the supply side, rather than a direct boost to demand,” she explained, “limiting the size of the immediate boost to growth.” She said that the economy’s ongoing reopening and improved immunization progress will likely be “greater triggers of near-term revival.” From January to March of this year, India’s economy grew by 1.6 percent over the previous year. Economists have warned that the GDP figure for April to June, the first quarter of the current fiscal year, may not reflect the full extent of the crisis in South Asia’s largest economy, which has been exacerbated by a deadly second wave of coronavirus outbreak. The success of loan guarantees, according to Aditi Nayar, principal economist at credit ratings agency ICRA, the Indian subsidiary of Moody’s, will be determined by how many new loans are disbursed by the lenders. Targeted fiscal deficit Economists have pointed out that the government will incur minimal upfront expenditures as a result of the loan guarantees. The fiscal stimulus announced during the second wave of the outbreak, including Monday’s measures, amounts to around 0.59 percent of GDP, according to Sonal Varma and Aurodeep Nandi of Nomura. They estimate that the total budgetary impact for the current year will be roughly 0.65 percent of GDP, including the government’s additional spending on free Covid-19 vaccines. Nonetheless, Nomura expects India to exceed its 6.8% fiscal deficit target due to increased spending and possibly reduced disinvestment data. The fiscal deficit for this year has been revised up to 7.1 percent of GDP by a Japanese investment bank. According to ICRA’s Nayar, some of the economic reforms announced on Monday, costing 2.4 trillion rupees, will be phased in over the next two to four years. “Some of these were originally mentioned during the Budget, so a portion of their cost has already been factored in,” she wrote in a note. According to Rao of DBS, the deficit is likely to surpass the target by 0.3 percent to 0.5 percent of GDP. Continue reading