February 28, 2024

Indian people stand in line at a COVID screening center at Ram Manohar Lohia Hospital (RML) after a case emerged in Delhi that was reported on Jan.

Imtiyaz Khan | Anadolu Agency | Getty Images

India has put in a series of rupees 6.3 trillion ($ 84.9 billion) of measures to boost the Covid-hit economy – but economists are skeptical that this will have a big impact on short-term growth.

The impact of these measures – amounting to around 2.8% of GDP – on the country’s budget deficit target is expected to be comparatively small.

Economists pointed out that most of the support comes in the form of loan guarantees, rather than direct incentives like checks paid directly to households. In addition, some of the measures have already been announced and have already been included in the calculations.

For the current fiscal year ending March 2022, India’s budget deficit target is around 6.8% of GDP. A budget deficit is the gap between a government’s income and spending, and it means that the country spends more than its income.

“While the headline impact of the announcements is significant, most of them were loan guarantees, which made the net financial impact less,” said Radhika Rao, an economist with DBS Group in Singapore, in a statement Tuesday.

She explained that some measures – such as subsidies, free grain and child health support – could likely have an impact on the budget deficit. However, there could be “some headroom” through higher nominal GDP and a likely re-prioritization of existing spending to minimize the risk of the budget deficit target being exceeded.

What was announced?

Treasury Secretary Nirmala Sitharaman announced several support measures on Monday, including providing around $ 35 billion in loan guarantees to help small businesses and sectors adversely affected by the pandemic.

Sitharaman said the government will provide 1.1 trillion rupees ($ 14.8 billion) in additional loans to businesses in sectors such as health care, tourism and other.

The government will also expand the emergency credit line guarantee program by an additional 1.5 trillion rupees ($ 20.2 billion) from an earlier limit of 3 trillion to 4.5 trillion rupees.

The program enables banks and non-bank lenders to provide emergency loans to eligible borrowers to conduct their businesses, and these loans are guaranteed by the government that covers default risks for lenders.

When it was launched, the program was seen as a relief for India’s micro, small and medium-sized enterprises, which are under pressure due to the crisis ravaged by the pandemic.

India also announced a loan guarantee program for microfinance institutions, which usually provide loans to the country’s smallest borrowers such as small business owners. The government will spend an additional $ 12.6 billion through November to provide free grain to millions of people.

Stimulating growth

Recent support measures were similar to the government’s response to India’s first wave of the coronavirus outbreak last year, Rao told CNBC via email. Monday’s announcement aimed to improve the flow of credit to the hardest hit sectors and households at risk, she said.

“Most of the fiscal boost comes on the supply side rather than a direct boost in demand that curbs the extent of the immediate growth stimulus,” she said. The continued reopening of the economy and improvement in vaccination progress are likely to be “bigger catalysts for near-term recovery,” she added.

India’s economy grew 1.6% year over year from January to March this year.

Economists have warned that April-June GDP pressures – the first quarter of the current fiscal year – may not reflect the full picture of the crisis in South Asia’s largest economy due to a devastating second wave of the coronavirus outbreak.

Aditi Nayar, chief economist at the rating agency ICRA, the Indian subsidiary of Moody’s, also pointed out that the success of loan guarantees depends on how many new loans are paid out by the lenders.

Budget deficit target

Economists pointed out that the loan guarantees will have limited up-front costs to the government.

Nomura’s Sonal Varma and Aurodeep Nandi said in a note that the fiscal stimulus announced during the second wave of the outbreak, including Monday’s measures, account for around 0.59% of GDP. Combined with the additional government spending on free Covid-19 vaccines, the total fiscal impact is expected to be around 0.65% of GDP for the current year.

Still, Nomura expects India to exceed its budget deficit target of 6.8% due to additional spending and potentially lower divestment figures. The Japanese investment bank revised its budget deficit estimate for the current year to 7.1% of GDP.

Some of Monday’s economic measures worth Rs 2.4 trillion will be spread over the next two to four years by the ICRA, according to Nayar. “Some of these had already been announced at the time of the budget, so part of their cost was already taken into account,” she said in a note.

DBS’s Rao estimates the deficit could exceed the target by 0.3% to 0.5% of GDP.