Lack of Direct Demand Stimulus May Jeopardise Economic Recovery in Medium-term: Ind-Ra
India's FY21 expenditure would be only Rs2,145 billion or 1.1% of gross domestic product (GDP) as much of the government support is in the form of credit guarantees and/or credit lines, having minimal impact on the government finances. However, the near-absence of demand-side measure in the economic package of Rs20.97 trillion will jeopardise recovery even in next two fiscals, says a research note.
In the report, India Ratings and Research’s (Ind-Ra) says, "Near-absence of demand-side measure in the economic package will jeopardise recovery even in FY22 and FY23 and may even lead to a second round impact on the economy, which means even if the supply side gets restored on account of the various measures announced by the government or the Reserve Bank of India (RBI), it may soon run into difficulty due to the lack of adequate demand for goods and services."
"Salary cuts, job losse and reverse migration due to the lockdown have only added to the dwindling consumption demand, already reeling under the reduced income growth of households coupled with a fall in savings and higher leverage over the past few years," the ratings agency points out.
According to the ratings agency, the sudden collapse of private final consumption expenditure growth in FY20 has resulted in a clamour that the FY21 budget must focus on and implement measures that will put more money in the pocket of the people who are at the bottom of the pyramid, to stimulate the consumption demand. However, the budget FY21 fell short on this account, despite fiscal deficit budgeted at 3.5% of GDP. The COVID-19 related lockdown and its impact on economy and livelihoods have only aggravated the sagging consumption demand, it added.
India’s economic package is more like the package of Brazil, Germany, France, Italy Japan, Korea, Spain and UK. Several other countries such as Australia, Canada, China, Indonesia, Mexico, Russia, Saudi Arabia, South Africa, Turkey and US however have chosen to focus more on spending and revenue measures, to address the fallout of COVID-19 pandemic.
Ind-Ra says it believes an appropriate demand-side measure is as important as supply-side measures. "This is not to say that supply-side issues did not need government support. It indeed was needed especially to restore or augment the supply chain of the economy where micro, small and medium enterprises (MSMEs) play an important role," it added.
In this respect, the ratings agency says, announcements such as Rs3 trillion collateral-free automatic loans for MSMEs, Rs200 billion subordinate debt for stressed MSMEs with partial guarantee, Rs25 billion employees provident fund support for 3 more months, funds of fund with an equity infusion of Rs100 billion, releasing of MSME dues within 45 days from the government and public sector undertakings are welcome steps.
Also, the liquidity scheme of Rs300 billion for non-bank finance companies (NBFCs), housing finance companies (HFCs) and micro finance institutions (MFIs), Rs450 billion partial credit guarantee scheme for NBFCs and Rs900 billion package for power distribution companies (discoms), additional liquidity of Rs2 trillion for farmers through Kisan Credit Card will help in reducing the financial woes building-up in economy due to the lockdown, Ind-Ra says.