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Business News/ News / India/  Stimulus is a solution, but be wary of fiscal deficit, says IMF’s Gita Gopinath

Stimulus is a solution, but be wary of fiscal deficit, says IMF’s Gita Gopinath

The IMF chief economist terms the current economic stasis as 'The Great Lockdown' and that it is fundamentally different from The Great Depression and 2008 financial crisis
  • 'Unlike previous instances, this time around, we actually don’t want people to go out and spend,' she said at an American talk show
  • Gopinath said it is important to make sure people who are losing jobs can maintain a basic lifestyle. (Photo: Bloomberg)Premium
    Gopinath said it is important to make sure people who are losing jobs can maintain a basic lifestyle. (Photo: Bloomberg)

    NEW DELHI:International Monetary Fund chief economist Gita Gopinath on Wednesday batted for pump priming of economies across the world, but warned that a substantial fiscal stimulus package will push up the fiscal deficit and debt-to-GDP ratio of economies and, for that, a proactive fiscal policy is needed.

    “If you don’t do what you are doing now, you can actually end up in a worse situation because economic activity will collapse so severely that your debt-to-GDP will be even worse. So things could be worse if you didn’t do what is needed right now. I think that is something everybody recognizes at this point," Gopinath said in a popular US television chat show.

    Gopinath said the current crisis, which she called the ‘Great Lockdown’, is fundamentally different from earlier crises such as the Great Depression or the Great Recession during the global financial crisis. “In the past if you lent the country money and told them to spend it, that would stimulate activity. But this time around, we actually don’t want people to go out and spend. We want them to stay at home. So this is about maintaining the economic system so that when the disease is under control, you can see a faster recovery," she told The Daily Show host Trevor Noah.

    Many countries, including India, have enforced lockdowns that have crippled economic activity leading to massive job losses, especially in the informal sector. India has rolled out a 1.7 trillion relief package in an attempt to limit the economic damage caused by the coronavirus outbreak and tackle the loss of livelihood for millions of poor hit by the lockdown.

    The government is also working on a fiscal stimulus to jump-start the economy apart from providing support to the healthcare and industrial sectors, economic affairs secretary Atanu Chakraborty has hinted. In addition, the Reserve Bank of India (RBI) has taken steps to boost liquidity in the banking system and encourage banks to lend.

    Apart from protecting lives of people and medical professionals who are the first respondents in this crisis, Gopinath said it is very important to make sure people who are losing jobs can maintain a basic lifestyle. “And it is very important to make sure that firms, small, medium enterprises have the resources they need so they can stay alight, once we pass this phase, we can see a recovery happening much faster," she added.

    Asked how soon the global economy can recover from the present crisis, Gopinath said besides economists and policy makers, it is going to depend a lot on what health experts have to say because it is not going to be possible to bring the economy back 100% if the coronavirus is not contained.

    “It is true that if all of this level out and you see some hope and signs in some countries of levelling up, then you can see a scenario where activity resumes going forward. Our projection is 2021 will be one of recovery. But there is so much uncertainty at this point. If containment measures work and this is not a very prolonged period, if people get back to work more quickly, and if policies that have been put in place are effective then we can think about a rebound," she added.

    Goldman Sachs on Wednesday projected the bleakest growth forecast for FY21 at 1.6% holding that the spread of the covid-19, nationwide shutdown, social distancing measures and fears among consumers and businesses may lead to a significant contraction in economic activity.

    However, the investment bank maintained that a strong sequential recovery in the second half of the fiscal year, based on three assumptions. “First, the three-week nationwide lockdown, which is expected to be removed only in a staggered fashion, and social distancing measures reduce new infections over the next 4-6 weeks. Second, while the fiscal easing so far has been limited, our expectation is for further fiscal stimulus by the centre and the states. Third, we expect RBI to continue with its monetary easing policy, along with liquidity infusion measures. While more forceful policy support could present some upside risk, the recovery could further be delayed if the pandemic is not brought under control globally and domestically over the next few months," it added.

    Prime Minister Narendra Modi on Tuesday in his meeting with Opposition leaders hinted that the 21-day lockdown may be extended.

    Shamika Ravi, senior fellow at Brookings India said the country cannot afford to wait for long to get clarity on the impact of the pandemic and then announce the economic response as an afterthought. “We will have to frontload the stimulus to lessen the economic impact. We should be having a response that works out to 4-5% of GDP. The economic stimulus need not be limited to fiscal measures and it could include more monetary measures too. The current moratorium on loan repayments should be extended to non-bank finance companies too," she added.

    Gireesh Chandra Prasad contributed to this story.

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    Published: 09 Apr 2020, 07:52 PM IST
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