India can spend $18 billion to fight virus impact, say analysts

By Anirban Nag

India is facing an economic shock as many parts of the country go into lockdown and the government will have to spend more and abandon fiscal deficit targets to cope, analysts said.

Growth may weaken to 3% in the first three months of this year from 4.3% estimated previously, according to Oxford Economics, while Jefferies sees room for the government to spend $18 billion to support activity. Still, in ANZ’s view expansion is set to remain weak over the next few years.

The readings about Asia’s third-largest economy come as policy makers are focused on ensuring Indians have cash in hand to buy essentials as more cities are locked down to prevent the spread of the virus, and countries around the world race to ease fiscal and monetary policies to shore up their economies.


The following are comments from economists watching India.

Fiscal Room
Mahesh Nandurkar and Abhinav Sinha at Jefferies:
“If the government expands the fiscal deficit target by 1 percentage point, it will create $18 billion of spending on a net basis,” the analysts wrote. The budget shortfall is targeted at 3.8% of gross domestic product in the current year and 3.5% in the year starting April 1.

The spending would include cash handouts of 5,000 rupees ($65.8) a month for 50 million workers for a quarter. That would entail an outgo of 750 billion rupees. And also likely forgo some revenue on account of goods and services tax cuts possibly on automobiles and durables.

Other ways to help the economy would be through interest payment deferrals or waivers to small business as well as additional spending on infrastructure projects and housing. Additional policy measures could include relaxation of non-performing loan rules and provisioning norms for banks.

What Bloomberg’s Economists Say:
Going by the size of fiscal aid unveiled by other governments around the world, we believe the Indian government needs around at least 1% of GDP in fiscal aid to meaningfully respond to the virus outbreak. That amounts to 2200 billion rupees, or roughly $30 billion, of aid. This should push the government’s budget deficit for fiscal 2021 up to a minimum of 4.5% of GDP, 1 ppt above its 3.5% target.
-- Abhishek Gupta, India economist

Slowdown Streak
Priyanka Kishore, head of India and Southeast Asia Economics at Oxford Economics:
While the economy was showing signs of turning a corner in the first two months of the year, Kishore sees the virus wiping out any chances of an economic recovery in the near term.

“We estimate that this could hit first-quarter 2020 GDP to the tune of $6.5-$7 billion and lower our first-quarter growth estimate to 3% year-on-year from 4.3% earlier,” she said. “A substantial downward revision to our full-year forecast is also likely.”

Prolonged Pain
Richard Yetsenga and Sanjay Mathur at ANZ:
“On balance, credit and GDP growth are set to remain weak over the next few years,” the analysts wrote in a note. “In fact, we believe the Indian economy has fallen into a complex feedback loop which will be difficult to exit. The crisis is chronic.”

A growth slowdown is likely to lead to more bad loans as companies fall behind on servicing their loans. That’ll be bad timing for the economy struggling with a shadow banking crisis, which in turn has crimped domestic consumption. Earlier this month, the Reserve Bank of India put a moratorium on the fourth largest private bank, Yes Bank Ltd, leading to more dislocation and tightening in credit markets.