On 12 October, India (Baa3 negative) unveiled its second round of fiscal stimulus, amounting
to INR467 billion ($6.4 billion), or about 0.2% of our real GDP forecast for fiscal 2020,
ending March 2021. Notwithstanding the fiscal prudence of the measures, the small scale of
the stimulus highlights limited budgetary firepower to support the economy during a very
sharp contraction, a credit negative.
The new stimulus, which includes cash payments to government employees and interestfree loans to states, aims to boost consumer spending during India’s festive season, and to
increase capital expenditure. The measures will involve additional direct official spending of
around INR410 billion, but will not require fresh funding given that the government lifted its
borrowing limit earlier in 2020 to allow for coronavirus-related expenditure.
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% of GDP. This compares with an
average of around 2.5% of GDP for Baa-rated peers as of mid-June.
Boost to economy from new stimulus will be small
India’s very weak fiscal position has constrained its scope for discretionary stimulus spending
in response to the coronavirus shock. We expect the general government debt burden
to peak at around 90% of GDP in 2020, up from about 72% of GDP in 2019, which is
significantly higher than the Baa median of around 59%.
The large debt burden is driven by chronically wide fiscal deficits. The general government
deficit expanded to 6.5% of GDP in fiscal 2019. In fiscal 2020, we expect weaker government
revenue, driven by the economic contraction and reduced corporate tax rates announced in
September 2019, to widen the general government deficit to around 12% of GDP.
While the latest stimulus will spur consumer spending over the near term as coronavirusrelated restrictions continue to be eased and India’s festive season begins, the support to
growth will be minimal.
The government expects the new stimulus to add around 0.5% of GDP – a small boost
compared with the 11.5% drop in real GDP that we forecast in fiscal 2020
Consumer confidence has remained subdued even as India has emerged from a very stringent nationwide lockdown, which drove a
24.5% contraction in private consumption in the April-June quarter, compared with the previous year.
The number of coronavirus cases in India is still elevated and the relaxation of restrictions on educational establishments,
entertainment facilities and gatherings from 15 October raises the risk of spread, which could weigh further on consumer sentiment.
As part of the latest stimulus, the Leave Travel Concession Cash Voucher Scheme will provide cash payments to public sector
employees and applicable private sector employees in place of annual leave encashment (money received in exchange for a period
of leave) and travel reimbursements available to them. The purchases must be made on goods subject to consumption tax of at
least 12%, and transactions must be digital and fall within fiscal 2020. In addition, the Special Festival Advance Scheme will offer
INR10,000 interest-free advances to central government employees, with the same spending deadline, and will require repayment over
a maximum of 10 installments over fiscal 2021.
To boost public investment, state governments will receive 50-year interest-free loans amounting to INR120 billion, with the loan
amount varying by state. The loans may be used for capital projects and must be utilized within fiscal 2020. The government will also
commit an additional INR250 billion for infrastructure projects and domestically made capital equipment, on top of the INR4.1 trillion
allocated for infrastructure expenditure in the fiscal 2020 budget.
Growth to settle around 6% medium term, potentially supported by reforms
We forecast growth to rebound to 10.6% in fiscal 2021, reflecting the comparison with the low GDP levels of 2020 as economic
activity gradually normalizes. Over the medium term, we expect growth to settle around 6%, with downside risks due in part to
ongoing stress within the financial system.
A series of recent agricultural sector and labor law reforms, which were announced as part of broader structural reforms and approved
by India’s parliament in September, could provide support to medium-term growth, if implemented effectively.
The agriculture reforms aim to increase efficiencies in the fragmented supply chain by expanding farmers’ direct access to produce
The labor law reforms consolidate and amend laws related to trade unions, conditions of employment in industrial establishments, and
settlement of industrial disputes.
Of particular significance is the raising of the threshold at which an employer must seek government approval for layoffs, to 300 from
100 workers, which provides some increased flexibility to employers and could help to increase India’s competitiveness.