COVID-19 | Little legroom for a big stimulus

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DK Srivastava

The COVID-19 pandemic has already damaged global and Indian growth prospects for 2020-21 to an extent which is likely to be worse than the 2008-09 global economic and financial crisis.

Growth Contraction And Economic Slowdown

In 2009, the global economy witnessed a contraction of (-) 0.1 percent. Many of the developed economies, such as the United States (-2.5 percent), Germany (-5.7 percent) and Japan (-5.4 percent) witnessed deeper contraction. Many multilateral institutions, rating agencies and think-tanks indicate that the impact of COVID-19 will force the world economy into a comparatively deeper recession. For example, Fitch, JP Morgan and the United Nations (lower estimate) project the global growth in 2020 to contract by (-) 1.9 percent, (-) 1.1 percent and (-) 0.9 percent respectively.

Large stimulus packages are being announced by countries in order to cope with this unfolding crisis. On March 26, the G-20 countries announced a $5 trillion stimulus package to counter the social and economic impact of COVID-19. The US, Australia and Germany have announced fiscal stimulus packages amounting to 11 percent, 9.7 percent and 4.9 percent of their respective GDP.

Challenges For Indian Economy

India has so far handled the pandemic better than many of its developed counterparts by relatively containing its spread. However, this has been achieved by locking down the entire country for about a month, bringing all economic activities to a standstill. There is a fear that as soon as the economy-wide lockdown is lifted, the number of COVID-19 cases will explode. Clearly, a carefully-designed exit strategy has to be devised in terms of economic sectors as well as geographical areas.

Undoubtedly, the Rabi crop has to be saved. The crop is already ripe for harvesting and a relaxation in the lockdown will enable farm labour to reach relevant areas. For harvesting, processing, procurement, transportation and storage of these crops, movement of labour and transportation from field to storage houses and mandis need to be facilitated. This means opening up of rural areas and major transport channels to targeted marketplaces. This may require state-specific policies and interventions.

Since it is the states which are more knowledgeable about the specific conditions in their rural areas, the spread of the virus, and the implementation strategies required, they  have to come up with a plan for a calibrated opening up. State governments may also activate aggressive procurement of the Rabi crops.

 Fiscal Stimulus: Need And Feasibility

While the need for a large fiscal stimulus is paramount, its prospects should be examined by taking into consideration the scope for financing a large fiscal deficit. In particular, as compared to the 2020-21 budget estimates, both the central and state governments would suffer a significant revenue erosion due to the lower 2019-20 tax base and lower growth prospects in 2020-21. There may also be slippages on account of non-tax revenues and non-debt capital receipts including disinvestment.

According to our estimates, if we only factor in lower GDP growth and slippage in tax revenues as compared to the budget estimates, the slippage may amount to a minimum of 1.5 percent of GDP considering the Centre and states together. Thus, to maintain the budgeted expenditures in 2020-21, the combined fiscal deficit may have to be increased from 6.5 percent to 8 percent of GDP. After accommodating the borrowing requirements of central and state public sector undertakings amounting to about 3.5 percent of GDP, the total public sector borrowing requirement (PSBR) comes to 11.5 percent of GDP.

Any stimulus in excess of budgeted expenditures would require additional borrowing over and above this limit. However, the sources from which borrowing can be done are highly constrained. The total available excess savings from the private sector, consisting of households and corporate sectors, may only be about 7 percent of GDP. Public sector net savings and net capital inflows may add another 2.5 percent of GDP. Thus, a gap of 2 percent points of GDP is left between the PSBR and the available resources. This would require financing either by monetising fiscal deficit or additional external borrowings to finance the budgeted expenditures.

Further stimulus would require finding additional resources. Thus, the choices available for the government for financing a large magnitude of stimulus in excess of the budgeted expenditures are significantly constrained. The government may do well to spread out the stimulus over two years and undertake considerable reprioritisation of the budgeted expenditures.

DK Srivastava, Chief Policy Advisor, EY India. Views are personal.

This is the seventh and last article in a multi-part series, World After COVID-19, which looks at the probable developments in various sectors: macro economy, trade, healthcare, agriculture, judiciary, international politics and sports.