Even as the country is expected to shrink by an unprecedented magnitude, the recovery in FY22 could be a sharp 8.8%, according to IMF. But, for that to happen, the government needs to take a leaf out of the fiscal book of other countries. What has made India among the worst performing economies post pandemic is the difference in the nature and size of the fiscal stimulus. The IMF said swift and large (an average 9% of gross domestic product) fiscal stimuli by most advanced economies has helped limit the damage from the pandemic. India, however, has lagged behind in its fiscal measures with a direct fiscal stimulus of less than 2% of GDP.
“For India, composition of fiscal support should be towards more direct support rather than indirect such as credit guarantee," said Malhar Nabar, chief of world economic studies at IMF in a virtual conference on Tuesday. The government has relied largely on indirect stimulus such as credit guarantees, and reallocation of resources instead of direct benefits such as tax cuts.
Economists have argued that direct fiscal stimulus in terms of tax cuts or cash transfers is the need of the hour. Even the latest package aimed at boosting demand has fallen short of expectations. “Overall, the amount of demand stimulus is underwhelming. With the previous rounds of budgetary support at around 1% of GDP, today’s demand stimulus measures take total fiscal support (on budget) to about 1.2% of GDP, which is small compared with the size of the growth hit, and reflects India’s weak fiscal starting position," wrote analysts at Nomura Financial Advisory and Securities India Ltd in a note on Monday after finance minister Nirmala Sitharaman announced measures worth ₹73,000 crore to fight the economic slowdown.
For fiscally-constrained countries such as India, the IMF has some advice too. Chief economist Gita Gopinath believes that even in a constrained fiscal position, governments can redirect wasteful subsidies to segments of the economy in greater need of stimulus. To foster recovery, public spending can be slowly redirected to investment progressively, IMF’s fiscal monitor report said.
“The stakes are high: although today’s large scale packages are necessary, they will have long-lasting implications—directly, through choices made about expenditures and investments, and indirectly, by calling for lower levels of discretionary spending or higher levels of taxation if borrowing costs rise significantly in the years ahead," the report said.
Crowding in private investment should be the goal. But for now, government should loosen its purse strings some more.