India: Government announces fourth lockdown extension and additional stimulus
On 17 May, the government confirmed that the national lockdown, which has been in place since 25 March, would be extended until 31 May—the fourth such lockdown extension. Earlier the same week, on 12 May, Prime Minister Narendra Modi announced stimulus worth an eye-catching INR 20 trillion or 10% of GDP to help the economy cope with the harsh effects of the coronavirus pandemic and associated restrictions.
The headline figure of this stimulus is the total value of all of the fiscal and monetary policy easing announced since March and includes new fiscal policy easing measures unveiled in May, such as loan guarantees for businesses and expanded support for vulnerable households, especially migrants and farmers. However, the total stimulus that reaches businesses and households directly from the government is much smaller than the headline figure, minimizing the immediate beneficial effects on the economy.
The fourth extension of India’s lockdown—which is among the strictest in the world, and continues to prohibit flights, metro services and most train journeys, maintain the nightly curfew hours, keep schools closed, and restrict most business activity—marks a further blow to prospects for the struggling economy. However, states have been given more control over opening up their regional economies, meaning those that can re-active their economies earlier than others, will likely gradually do so. For example, the National Capital Territory, home to capital city New Delhi, will allow greater freedoms than Maharashtra state, home to Mumbai, due to the former’s less extensive spread of Covid-19.
Assessing the policy response, Prachi Mishra and Andrew Tilton of Goldman Sachs said: “we believe that policy support, in particular discretionary fiscal policy support (defined as direct support to households and businesses) […] has been tepid so far”. Mishra and Tilton highlighted that the discretionary component of fiscal support is important to minimize second-round economic effects of the pandemic, and ensure the economy rebounds more quickly. They noted the amount of this stimulus announced since March stands at 1.3% of GDP (INR 2.7 trillion), which is much smaller than the aggregate figure announced by PM Modi.
Sonal Varma and Aurodeep Nandi of Nomura also crunched the numbers of PM Modi’s announcement. They noted that the Reserve Bank of India’s (RBI) liquidity easing measures account for 40% of the headline stimulus sum. Of the fiscal stimulus, they said “the bulk of the support” emanates from loan guarantees for businesses, which, along with RBI action, further support their ability to access liquidity. The economists said actual cash outgoings from the government are modest, and concluded the government has aimed for “the maximum bang with minimum buck”. Still, with higher spending and less revenue on the cards, Varma and Nandi estimated the central government’s fiscal deficit for the fiscal year ending March 2021 is likely to rise to 7.0% of GDP.
In sum, although the government and Reserve Bank of India have announced various forms of policy support, discretionary support does not go as far as in many other developing economies, including China, meaning the speed of recovery in India is likely to be relatively constrained. Moreover, given that the spread of coronavirus in India appears extensive, lockdown measures are unlikely to be lifted in their totality very soon. As a result, the economic outlook for India remains difficult.