Print Friendly, PDF & Email

Insights into Editorial: We have a narrow window to enact fiscal relief measures



As the COVID-19 pandemic continues to ravage economies across the world, policymakers are desperately seeking effective ways to mitigate its economic effects.

The immediate future appears dire for large emerging markets including India, which recently saw its growth forecast for 2020 slashed by the International Monetary Fund (IMF) to 1.9% from the previously estimated 5.8%.

In April, the World Bank estimated that India would grow 1.5% to 2.8% in 2020-2021, the lowest since the start of the 1991 economic reforms.

Dim as these projections are, what is of concern is that these are already starting to look overly optimistic considering that India has extended the lockdown.

What about the size of fiscal relief?

Current calculations suggest that we need a fiscal relief programme of around 5% of GDP.

The longer we delay the announcement and rollout of the measures the larger will the need become. So, time is of the essence.

We also need to understand that, in any case, this year’s deficit will be higher because of loss of economic activity resulting in lower tax and non-tax revenues.

Hence broad quantitative assessment is that the India’s debt-GDP ratio, in the present unusual circumstances, could well go up to about 90% of GDP in this fiscal year, if we undertake such fiscal relief.

The guiding framework here would have to be some assessment of the fiscal actions that may be needed to restore economic activity juxtaposed against possible injections necessary to restore the financial sector in the absence of fiscal action now.

What about monetising part of the fiscal deficit?

  1. These are totally exceptional times when we have to think out-of-the-box but prudently.
  2. If found necessary in view of developments in the financial markets, and excessive pressure on government securities yields, the Reserve Bank will need to use all the tools at its disposal to support government financing as necessary.
  3. If it is feasible to finance the deficit without resort to RBI, while keeping the long-term bond yields under control as at present, that would be preferable.
  4. That will enable appropriate price discovery, and the RBI could conduct almost back to back OMOs.
  5. RBI has already expanded its WMA (ways and means advances) limit to the central government significantly to Rs2,00,000 crore, and has also increased the state governmentt limits to 60%.
  6. This is a very good move. It reduces the cost of borrowing for the government; it helps the bond market from spiking in terms of yield; and gives government and the RBI time to see if further financing is needed from the RBI without disturbing the bond market significantly.
  7. But this may not be enough. State governments are bearing the brunt of many expenditures required to protect the livelihoods of the poorest while suffering significant declines in their revenues.
  8. Thus, they will also need significant support from the central government and the Reserve Bank combined.
  9. Various measures that can be thought of are OMOs in state government securities, the inclusion of state government securities in SLR provisions for banks, central government borrowing and onward lending to states.

How do you see the revival of demand playing out in this new normal where social distancing will have to be a part?

  1. That is exactly the difficulty that one is foreseeing. Going sector by sector and starting with the most obvious large sector: airlines.
  2. We don’t have any sense when we will start operating flights—domestic and international. This is one sector where supply is clearly being impacted. Even if we start certain flights, for some time to come there will be very low demand because people will be scared of flying.
  3. Second, is the tourism sector which includes large hotels, small hotels, restaurants and so on. Supply here will also be impacted for quite some time.
  4. There are ways on how to phase in activities in these sectors. For example, for hotels it ought to be feasible to operate them at some capacity while practising physical distancing. In the case of hotels, it ought to be feasible for them to operate to cover their fixed costs, assuming travel is permitted.
  5. Third, it ought to be feasible to allow some degree of restaurant opening even if it is through a much greater emphasis on take-out and deliveries.
  6. There are a large number of people employed in that sector as well across the country.
  7. Third, construction sector where there is both a problem of supply and demand.
  8. Given the impact that incomes have taken, I would presume that the real estate sector will go through some difficulty in the short and medium term.
  9. If they are under construction, it ought to be feasible to start getting people in and get activity going. There will be a problem there because of the labour disruption that has taken place. None of these things are easy.

Need of the hour: Adequate fiscal space:

Although it is important to do whatever it takes to moderate the meltdown, offer disaster relief and eventually kick-start the economy, there are valid concerns that unless there is proper governance of any massive fiscal spending, even a very well-intentioned policy may end up doing more harm than good.

Even countries like China have been guarded in their fiscal responses so far. In China, this was partly to avoid a rise in its shadow banking activities, which turned out to be one of the perverse side-effects of its massive stimulus post the global financial crisis.

Countries with higher initial public debt levels like India need to be particularly concerned as they also happen to possess the least state capacity to make tough decisions to return to a trajectory of fiscal credibility.

This crisis has made clear the critical importance for countries to build adequate fiscal space to manage future economic distresses.

Given the acute constraints on fiscal policy in India, there is clearly a need to start re-prioritising expenditures away from low-priority, unproductive areas towards greater spending on health and social safety nets for low-income households.


The government should contemplate and across the board interest-rate subsidy of 2 to 3% for on lending by banks, and possibly NBFCs (non-banking financial companies) for a specified period of time.

The cost of this is quite low in the current circumstances. So additional lending Rs1,00,000 crore would mean a fiscal cost of only Rs2,000 crore.

The modalities of such a measure would need to be worked out in some detail but that this would be much more effective than any further attempts to reduce policy rates.

What this does is to keep deposit interest rates at reasonable real rates, borrowers get the benefit of more interest rates, while protecting bank balance sheets and thereby financial stability of the system.

Insights Current Affairs Analysis (ICAN) by IAS Topper