India has unveiled plans to inject at least $10bn into its economy, amid warnings from economists that New Delhi has done too little to revive growth after the shock of its coronavirus lockdown.
Nirmala Sitharaman, finance minister, said the stimulus scheme would increase capital expenditure, help cash-strapped states and encourage consumer spending with measures that included giving central government employees advance wages ahead of the upcoming festival season.
Monday’s announcement comes days after the Reserve Bank of India said gross domestic product would contract by 9.5 per cent during the current April to March financial year — the first official acknowledgment of the magnitude of India’s economic crisis.
However, economists reacted coolly to the new measures, concluding they would have only a marginal impact on an economy that contracted by 24 per cent year on year in the April to June quarter.
As Ms Sitharaman announced the economic plan, the Bombay Stock Exchange slipped into negative territory, recovering later to close marginally up.
“It’s pretty underwhelming,” said Shilan Shah, India economist at Capital Economics, which expects India’s economy to contract by 12 per cent this year. “It appears more symbolic rather than anything particularly meaningful.”
The new measures are expected to provide a direct demand boost of less than 0.4 per cent of GDP, which Mr Shah called “very, very small”.
The Indian government resisted economists’ calls to turn on the fiscal tap to support collapsing growth, fearing such a move would blow out its public finances and encourage international rating agencies to downgrade its debt.
Ms Sitharaman again emphasised New Delhi’s commitment to fiscal prudence on Monday, though India’s combined fiscal deficit is already expected to soar as high as 13 per cent this year as revenues collapse.
“Measures by the government to stimulate demand must not burden the common citizens with future inflation,” she said. “It must not put government debt on an unsustainable path. Today’s solution should not cause tomorrow’s problem.”
New Delhi plans to boost its capital expenditure budget for the year by 6 per cent, with the additional $3.4bn devoted to spending on roads, water supply, urban development and defence infrastructure.
New Delhi will also give a total of $1.6bn in 50-year, interest-free loans to cash-strapped states to use for capital expenditure by March 31, or to pay outstanding bills for already completed work.
New Delhi has also devised a complex scheme to permit central government employees, public sector bank staff, and staff of state-owned enterprises to use money allocated for home leave and other holiday travel to instead purchase consumer goods.
All central government employees will also receive a Rs10,000 ($136) interest-free advance for the upcoming festival season. The funds — which will be given through a pre-paid card — must be spent by March 31, and will be repaid in 10 equal instalments.
Radhika Rao, an economist from DBS Research Group, said New Delhi’s latest initiatives were designed to spur consumption “while also being spending-lite so as not to put an additional burden on the exchequer in the midst of a notable shortfall of tax and disinvestment revenues”.