New Delhi: India should refrain from setting a budget deficit target for the year ending March because the coronavirus outbreak is forcing the government to undertake unscheduled spending, an adviser to Prime Minister Narendra Modi said.
India 21 trillion rupees ($278 billion) spending to help the economy battle the fallout of the pandemic along with higher borrowings to bridge the steep fall in revenue collections. The government had planned to rein in the deficit at 3.5% of gross domestic product in February’s budget.
“Fixing any fiscal deficit target is not possible this year because there are so many unknowns,” Rajiv Kumar, vice chairman of the government think tank, Niti Aayog, said in an interview last week. “Therefore we now have to take a dynamic view of the fiscal deficit rather than get bogged down by any specific number.”
Asia’s third-largest economy is on the brink of its first contraction in four decades as consumer demand collapsed after Prime Minister Modi enforced the world’s most stringent stay-at-home rules locking up 1.3 billion people in their homes since 25 March. Goldman Sachs Group Inc. expects the economy to shrink by 5% in the year ending March, deeper than any other recession India has ever experienced since independence in 1947.
Reforms announced in the past few days to accelerate growth are likely to have an impact over the medium-term but may not revive growth in the short term, Goldman economists Prachi Mishra and Andrew Tilton wrote in a note dated 17 May. While restrictions have been eased, millions have lost their jobs prompting the administration to announce a spending plan of nearly 10% of GDP.
Meanwhile, the spread of the infection has been relentless and there could be a need to spend more to contain its fallout. The country has seen over 95,000 infections and 3,000 deaths so far. Nomura Holdings Inc. estimates India’s budget deficit will widen to 7% of gross domestic product, with output shrinking by 5.2%.
“If we constraint policy in a straitjacket on some fixed fiscal deficit numbers, we lose our degree of freedom for necessary and appropriate action,” Kumar said in an interview conducted via video conference.
A downgrade of country’s sovereign ratings was unlikely as the situation was unprecedented crisis and no country had been spared, Kumar said. Moody’s Investors Service currently rates India at Baa2, in line with Colombia, Indonesia and the Philippines. S&P Global Ratings and Fitch Ratings have a BBB- assessment, the lowest investment-grade level.
“To use old norms for judging is neither rational nor called for,” Kumar said. –Bloomberg