India’s new fiscal stimulus shifts focus back to longer-term growth, says Moody’s


India’s recent $36 billion-worth economic stimulus measures that aim to boost manufacturing and create more jobs present a potential upside to the country’s economic growth forecasts, Moody’s said in a report on Thursday.

Only about a week ago, the global ratings agency had revised upwards its previous growth forecast for the South Asian nation. It had predicted that India’s GDP would contract by 8.9% during the current financial year instead of a previous forecast of 9.6%.

“We currently expect India’s growth to reach 10.8% in the fiscal 2021 (ending March 2022), compared with our earlier forecast of 10.6%, and to settle around 6% in the medium term,” Moody’s said. 

Consumer confidence in India remains relatively low amid a continued elevated number of daily new coronavirus cases, although this has come down from a peak in September. However, stronger nominal GDP growth over the medium term would make it easier for India’s government to address its weak fiscal position,

Government debt seen rising

“We forecast government debt to increase to 89.3% of GDP in fiscal 2020 and decline to 87.5% in fiscal 2021, from an already elevated 72.2% in fiscal 2019,” Moody’s added.. 

It expects India’s fiscal deficit to reach around 12% of GDP  in fiscal 2020, but narrow to about 7% of GDP over the medium term — which is still above above the deficit of 6.5% of GDP in 2019.

The new stimulus measures target manufacturing competitiveness. The boost was provided through a 12-point program including fiscal incentives for housing and infrastructure as well as incentivising job creation among the private sector.

The measures followed a day after the government announced a production linked incentive scheme for as many as ten sectors including packaged food, speciality steel, pharmaceuticals and automobiles and auto components.

No new borrowing expected

The latest package follows the INR467 billion (0.2% of GDP) of stimulus announced in October and close to INR2 trillion (1% of GDP) of direct spending allocated in the government’s first stimulus package in May. The government expects that no new borrowing will be required to fund the additional spending.

The government approved 16 companies under the initial launch of the PLI scheme in April for mobile phone and specified electronic components manufacturers. Under the scheme, manufacturers in key sectors will receive incentives in the form of direct payments over five years.

The scheme aims to increase the competitiveness of India’s manufacturing sector, potentially reviving private investment, where year-on-year growth has been trending downward since the second quarter of 2018. 

The broadening of the PLI scheme builds on the reforms announced in the May stimulus package, which reinforced the push for greater self-reliance since the launch of the “Make in India” initiative dating back to 2014. 

“As countries have increasingly looked to greater diversification in their supply chains since the coronavirus pandemic, the timely introduction of these measures could boost India’s manufacturing industry, which contributed around 15% of GDP in 2019,” Moody’s said.  

Employment creation

The latest stimulus measures are also aimed at creating employment at a time when there has large-scale disruption of employment. Data from the Centre for Monitoring Indian Economy show that unemployment remains high, although both urban and rural unemployment rates have recovered from peaks in April and May.

Under the program, the government will fund provident fund contributions for eligible new employees hired within a two-year period, starting in October, and cover the employer’s contribution on top of the employee’s contribution for companies with 1,000 employees or less.

Eligibility is restricted to employees earning a monthly wage of less than INR15,000.

“The wage support provided to businesses and the push to scale up production under the PLI scheme could increase employment in India’s persistently soft labor market,” Moody’s said.

For the rural sector, the government announced a 650 billion rupees fertiliser subsidy program as well as strengthened a jobs support program. 
In addition, the government has extended its emergency credit line guarantee scheme that it announced in May, providing full, collateral-free, guarantees on lending to small and medium-sized enterprises on up to 20% of outstanding loans by a further four months until March nest year.

The scheme has been widened to cover businesses in identified stress sectors which did not qualify initially, with outstanding credit on 29 February 2020 of up to 5 billion rupees. A one-year moratorium on principal repayments is provided on the additional credit disbursed, with a four-year repayment period. 

“This will boost credit flow, a key element in the economy’s recovery,” Moody’s added.

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