Mumbai: The coronavirus pandemic and lockdowns in lieu of it has mounted the fiscal costs for governments across the world. By and large most countries have opted for direct fiscal stimulus with monetary support to rekindle economic activity.
Advanced economies such as the US and European nations have been at the forefront of direct fiscal support.
In terms of total economic support, India is fourth largest among G-20 nations, data from the International Monetary Fund (IMF) shows. Brazil has the largest size of economic stimulus plan at 12% of its gross domestic product (GDP).
But India and Turkey have been outliers when it comes to the style of economic support.
India’s direct fiscal support to the economy is estimated to be 1.2% of its GDP. Indirect support through liquidity measures and other monetary support works out to 4.9% of GDP. Most emerging market economies have opted for a direct expenditure by the governments and monetary measures have been secondary in size.
Is India right in its approach?
The IMF’s financial stability report offers some indications. The fund notes that liquidity support in various countries has eased financial conditions over the past two months. “Swift and unprecedented central bank measures have been a major factor in the market recovery," the report said.
Credit spreads have narrowed, making access to credit easier. Indeed, in the domestic corporate bond market yields have dropped and private sector issuers are finding it easy to raise funds. Interest from foreign investors too has increased in emerging market economies including India owing to large monetary stimulus by advanced economies.
The Reserve Bank of India’s liquidity measures including unconventional targeted long-term repos have eased credit conditions.
But here is the flip side. The IMF notes that markets globally have turned rather exuberant although economic conditions do not warrant. While India’s economy is expected to shrink by 5% in the current year, equity indices have shown a rising streak. A Bank of America Global Fund Manager Survey showed that about 78% of global fund managers see markets as the most overvalued since 1998.
The IMF warns of several uncertainties such as trade tensions, a second wave of the pandemic and a deeper-than-expected recession. Equity and bond markets could correct in the wake of these materialising, the fund said. India may not be an outlier in this case.