The rating agency was referring to the Rs 46,700 crore stimulus annouced by the government on Monday which includes cash payments to government employees and interest-free loans to states with an aim to boost consumer spending during India’s festive season, and to increase capital expenditures.
Moodys put these measures at 0.2% of its real GDP forecast for fiscal 2020, ending March 2021 and said it highlights the government’s limitations.
“Notwithstanding the fiscal prudence of the measures, the small scale of the stimulus highlights limited budgetary firepower to support the economy during a very sharp contraction, a credit negative. Even when combined with the government’s fiscal stimulus earlier in 2020, the size of the measures remains modest. In total, the two rounds of stimulus bring the government’s direct spending on coronavirus-related fiscal support to around 1.2% of GDP. This compares with an average of around 2.5% of GDP for Baa-rated peers as of mid-June1,” Moodys said.
India’s very weak fiscal position has constrained its scope for discretionary stimulus spending in response to the coronavirus shock., the rating agency said.
“We expect the general government debt burden to peak at around 90% of GDP in 2020, up from about 72% of GDP in 2019, which is significantly higher than the Baa median of around 59%. The large debt burden is driven by chronically wide fiscal deficits. The general government deficit expanded to 6.5% of GDP in fiscal 2019 (which ended 31 March 2019). In fiscal 2020, we expect weaker government revenue, driven by the economic contraction and reduced corporate tax rates announced in September 2019, to widen the general government deficit to around 12% of GDP,” Moodys said.
Last month Moodys slashed India’s groeth forecast for the current fiscal ending March 2021 to -11% from its ealier projection of -4% because of the country’s constrianed credit profile due to low growth, high debt and weak financial system.
On Thursday Moody’s said that while the latest stimulus will spur consumer spending over the near term as coronavirus-related restrictions continue to be eased and India’s festive season begins, the support to growth will be minimal. “The government expects the new stimulus to add around 0.5% of GDP – a small boost compared with the 11.5% drop in real GDP that we forecast in fiscal 2020. Consumer confidence has remained subdued even as India has emerged from a very stringent nationwide lockdown, which drove a 24.5% contraction in private consumption in the April-June quarter, compared with the previous year. The number of coronavirus cases in India is still elevated and the relaxation of restrictions on educational establishments, entertainment facilities and gatherings from 15 October raises the risk of spread, which could weigh further on consumer sentiment,” Moodys said.
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As part of its stimulus plan and to boost public investment, state governments will receive 50-year interest-free loans amounting Rs 12,000 crore, with the loan amount varying by state. The loans may be used for capital projects and must be utilized within fiscal 2020. The government will also commit an additional Rs 25,000 crore for infrastructure projects and domestically made capital equipment, on top of the Rs4.1 lakh crore allocated for infrastructure expenditure in the fiscal 2020 budget.
Moodys expects growth to rebound to 10.6% in fiscal 2021, helped by the statistical base effect of a negative GDP levels of 2020 as economic activity gradually normalizes.
“Over the medium term, we expect growth to settle around 6%, with downside risks due in part to ongoing stress within the financial system,” Moodys said.