IMF sees scope for more monetary and fiscal stimulus in India

There is further scope for a monetary as well as fiscal stimulus in India, but it will also have to return quickly to fiscal consolidation once the COVID-19 pandemic is behind us, top officials of the International Monetary Fund said on Wednesday.

Speaking in a webinar organised by the NSE, the officials called for continued reforms in India’s banking sector and the need to push for privatisation of profitable companies, a move that would free up more resources for the government.

In May this year, the centre announced a Rs 20 lakh crore economic package. However a lot it was in the form of credit guarantees, apart from several structural reforms. Ranil Salgado, mission chief for India at the IMF said that overall the stimulus was substantial, but the explicit spending measures were average or below average, compared to some other emerging markets and much less than the industrialised economies.

“This is an unusual emergency. We do believe that India, despite its limited fiscal space, could maybe provide above the line support. Its possible they are retaining some policy power for later down the line. We do see scope for further fiscal support as well as we still think there could be potential for monetary policy support as long as inflation continues to fall,” Salgado said.

India’s fiscal deficit touched Rs 4.66 lakh crore or 58.6 per cent of the budget estimate in just the first two months of the current financial year. India Ratings and Research expects India’s fiscal deficit to touch 7.6 per cent in 2020-21, given the various fiscal stimulus measures announced.

IMF officials feel a privatisation push could make additional resources available for the government.

“We support efforts to privatise, especially public sector units, where there is not a clear reason, clear benefits for them to be publicly owned or run. We do see significant scope not just from an economic efficiency point of view, but also to provide additional resources to the government, at a time the government does need those additional resources,” said Salgado.

In June, IMF downgraded India’s economic growth forecasts; it sees a sharp contraction of 4.5 per cent in the year ending March 2021, compared with 1.9 per cent growth it had expected earlier.

Salgado said the COVID-19 pandemic may put further stress on the banking sector. The RBI in its financial stability report had also noted that gross non-performing assets could touch 12.5 per cent in the current financial year.

“Before the COVID shock, a large part of the discussion was what we are calling India’s credit crunch. Those reflect stresses in the banking system as well as stresses in the non-bank financial sector. Bank credit these days has roughly stabilised at 6 per cent, but for India that is relatively low, but the positive there is at least, its holding up,” he said.

The IMF official also raised concerns over rising corporate debt, which he said would have to be watched out for.

“Outstanding corporate debt in India has been growing and corporate regulatory issues have also been growing. These are something to watch, especially given the COVID shock is affecting the corporate sectors. We have equivalent concern with MSMEs (micro, small and medium enterprises), as they are struggling through the COVID crisis,” he added.

The centre imposed a nationwide lockdown to curb the COVID-19 pandemic, which had a huge impact across sectors in April and May. While, the government started lifting the lockdown from June and several leading indicators like the manufacturing PMI (purchasing managers index) rose in June, the IMF officials are concerned that the cases continue to rise in India and point that the exit is not as strong as the negative impact from the lockdown.

IMF has projected that the global economy will contract 4.9 per cent this year. The expectation was that there will be a faster recovery in 2021, led by the private sector. However, now there is some uncertainty over this assumption and there are worries that policy makers, particularly in the Asia Pacific region, will not have enough space to support economies next year.  

“We are expecting that in 2021, the growth rates will be led by the private sector. For various reasons, we are little bit uncertain, whether this assumption of this private sector-led growth can happen. If that forecast is not realised, what we worry about is Asia policy makers will not have enough policy space to provide the level of support, they have done in 2020,” said Changyong Rhee, director, Asia Pacific department at IMF.

“This year, compared with Latin America, United States and Europe, Asia has been doing relatively better. But, in 2021, whether we can expect little bit faster growth rate in Asia, that is a big question,” he added.