India’s cash-strapped economic plan unlikely to mitigate coronavirus hit

NEW DELHI (Reuters) – India’s $ 266 billion economic rescue package is primarily based on boosting business credit, but contains little new government spending, tax breaks or cash support to jumpstart demand and prevent companies collapse, say business leaders and economists.

FILE PHOTO: Migrant workers rest as they wait to cross the border to reach their home state of Uttar Pradesh, during an extended national lockdown to curb the spread of the coronavirus disease (COVID-19), outside New Delhi, India . May 18, 2020. REUTERS / Danish Siddiqui

Businesses from airlines to small shops are reeling from Prime Minister Narendra Modi’s nearly two-month shutdown of India’s 1.3 billion people with the goal of limiting the spread of the new coronavirus. Many companies say they will not survive unless rescued immediately.

The government said on Sunday it would privatize state-owned companies in non-strategic sectors and stop new insolvency cases for a year.

But other than that, his plans involve a combination of easy loan schemes, a little more money for a rural employment guarantee program, and a series of long-awaited policy reforms in all sectors that will take effect in the medium term.

Taken together, this is not enough of a boost to avoid a likely 5% contraction in Asia’s third-largest economy in fiscal 2020/2021, Goldman Sachs said Monday. He said he expected the economy to contract an annualized 45% in the quarter through the end of June.

Business leaders are not impressed by the government’s response.

“We’re creating all kinds of liquidity for supply, but what about demand?” Said Kiran Mazumdar Shaw, president of Biocon Limited, one of the nation’s leading healthcare firms.

“Demand is going to play a very important role in the economic recovery, and if we cannot get the demand going, I am afraid that we will not be able to have an economic recovery. I think we have missed a great opportunity, “he said.

A breakdown of the bailout plan shows that actual government spending is only about one-tenth of the $ 266 billion package, which Modi had hailed as 10% of India’s gross domestic product in line with the grand plans of stimulus announced by other major economies.

A large part of the rest of the package is actually loans made by banks, many of them unsecured, that leverage $ 105 billion of liquidity provided by the central bank, government officials said.

“We would not qualify it as a stimulus package … Only 1% of GDP is given to make up for lost revenue, which is probably not enough,” said Sunil Tirumalai of brokerage Emkay Global.

One percent of GDP would equal about $ 29 billion, and the government could spend even less than that as it fears a sovereign rating downgrade.


Two government officials said the government estimates a total spending of $ 27 billion from the budget this year for the bailout measures, which would prevent the fiscal deficit from widening more than 100 basis points beyond the 3.5% target. of GDP.

The Finance Ministry should also assess the scale of intervention required if the coronavirus pandemic lasts longer than expected, authorities said.

“We do not know how the situation would evolve or how long it will last. We need to prepare for that too, as the government has limited resources and needs to spend wisely, “said one of the officials, who did not want to be named.

Distress is increasing throughout the economy. Emkay estimated the cost of the lockdown at around $ 170 billion overall.

Indian airlines are suffering an average daily loss of $ 10 million to $ 12 million and will need additional funds of 325 billion to 350 billion rupees ($ 4.3 billion to $ 4.6 billion) in the next two years, according to rating agency ICRA, a unit of Moody’s.

Airlines have been cutting staff and wages to avoid defaulting on debts to their landlords or banks, even as their fixed costs, such as service and parking fees, continue to rise.

The government has also failed to provide support to the tourism industry, which is likely to see tens of thousands of job cuts and small businesses go bankrupt, the Federation of Indian Tourism and Hospitality Associations said.

And a fifth of the 70 million retailers who form the basis of Modi’s political support may collapse because they cannot pay wages and rent.

With the lockdown now extended until the end of May, only one thing seems certain: the road back to economic health will be long and difficult.

“It is certain that there will be a sharp drop in production this year. And we continue to believe that the recovery will be slow, “said Shilan Shah of the research firm Capital Economics.

($ 1 = 75.7770 Indian rupees)

Report from Aftab Ahmed and Abhirup Roy; Additional reports from Aditi Shah; Editing by Sanjeev Miglani and Hugh Lawson

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