Covid shock: India got its response right

Context:  The economic recovery thus far has vindicated the government's approach to minimizing the impact of the pandemic.

Reasons for India to limit fiscal stimulus: for the year in the range of 2-2.5 % of GDP.

• Priority to remove full lockdown at the earliest: It was seen as the best way to contain the impact of the pandemic on the economy
• India's fiscal position was already difficult: A substantial expansion in the fiscal deficit would have implications for the sovereign rating and for an early return to fiscal consolidation post the pandemic.
• Majority could survive with enough liquidity support.
• No point in increasing demand while the supply is constrained: Cash transfers would be saved, not spent, and spending on infrastructure would remain on paper.
• Large stimulus may lead to high inflation.

Positive consequences of fiscal stimulus:

• Faster recovery: All indicators point to a faster revival in growth than forecast earlier.
• Resilience in the banking sector: Reserve bank of India (RBI) announced a policy on moratorium (2 phases) and restructuring of loans.
  • Keeping Non-Performing Assets (NPAs) in check: Investment bank Jefferies estimates that moratorium loans accounted for only 31 % of all loans in Phase I and 18 % in Phase 2.
  • The number of firms asking for loan restructuring was also very low. Even in the hotel sector, which is among the worst hit, not many firms have asked for loan restructuring.
  • CRISIL now expects the non-performing loans to total loans ratio to be 11-11.5 %, which is below the lower range of the RBI forecast.
• Increase in inflows of foreign capital: In April-September 2020-21, Foreign Institutional Investor (FII) inflows were $8 billion, compared to $7.2 billion in the same period in the previous year.
  • Gross FDI inflows were $40 billion and $36 billion, respectively in the two periods.

Conclusion: The government got its policy response to the pandemic right by providing liquidity support and easing restrictions on movement in stages instead of resorting to a massive fiscal stimulus.