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Stimulus 2.0 has minimal firepower to support growth, says Moody's

The government expects the new stimulus to add around 0.5 per cent of GDP - a small boost compared with the 11.5 per cent drop in real GDP for year ending March 2021

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Moody's | Indian Economy

Abhijit Lele  |  Mumbai 

gdp, growth, forecast, profit, economy, bank
Even when combined with the government’s fiscal stimulus earlier in 2020, the size of the measures remains modest.

India’s second round of stimulus package will provide limited support to growth and highlights budgetary constraint to back the economy during a very sharp contraction, rating agency Moody’s said on Thursday.

On October 12, Finance Minister Nirmala Sitharaman unveiled its second round of fiscal stimulus, amounting to Rs 46,700 crore ($6.4 billion), which is about 0.2 per cent the gross domestic product (GDP) for year ending March 2021. The new stimulus, which includes cash payments to government employees and interest-free loans to states, aims to boost consumer spending during India’s festive season and to increase capital expenditures.

The measures will involve additional direct official spending of around Rs 41,000 crore, but will not require fresh funding given that the government lifted its borrowing limit earlier in 2020 to allow for coronavirus-related expenditure, Moody’s said.

Even when combined with the government’s fiscal stimulus earlier in 2020, the size of the measures remains modest. In total, the two rounds of stimulus bring the government’s direct spending on coronavirus-related fiscal support to around 1.2 per cent of GDP. This compares with an average of around 2.5 per cent of GDP for Baa-rated peers as of mid-June. While the latest stimulus will spur consumer spending over the near term as Covid restrictions continue to be eased and India’s festive season begins, the support to growth will be minimal, the agency said.

The government expects the new stimulus to add around 0.5 per cent of GDP – a small boost compared with the 11.5 per cent drop in real GDP for year ending March 2021. Consumer confidence has remained subdued even as India has emerged from a very stringent nationwide lockdown, which drove a 24.5 per cent contraction in private consumption in the April-June quarter, compared with the previous year.

Moody’s has forecast that growth will rebound to 10.6 per cent in year ending March 2022, reflecting the comparison with the low GDP levels of previous years as economic activity gradually normalises. “Over the medium term, we expect growth to settle around 6 per cent, with downside risks due in part to ongoing stress within the financial system,” the agency said.

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First Published: Fri, October 16 2020. 01:53 IST
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