Saving the economy from COVID-19

Will India’s 20 lakh crore relief package deliver?

On May 12, 2020, Prime Minister Narendra Modi addressed the nation through a televised address whereby he outlined the plan for India’s continuing response to the Covid-19 pandemic. He urged self-reliance and promotion of Indian enterprises. He also announced a special economic package, and said that the recent announcements by the government as well as the measures by the RBI, combined with the May 12 financial package amount to Rs. 20 lakh crore — nearly 10% of India’s GDP. The details of this special economic package were announced by the Finance Minister, Nirmala Sitharaman, through daily press briefings. The document attached here analyses the measures announced by the Finance Minister.

A careful perusal of the measures indicates a far lower fiscal outgo than what would have been expected for a stimulus equaling Rs. 20 lakh crore. Many announcements are a reiteration of earlier expenditure measures, and some others focus on monetary policy interventions to increase money supply. Several measures aim at long-term impact, without having any direct implications for the short-term COVID-19 recovery process. Fitch solutions, a macro intelligence firm estimates the fiscal impact of the additional stimulus to be only about 1% of GDP as opposed to the suggested 10%. Many analysts have thus called out the government’s tepid response to the crisis, especially given the economic contraction that India is staring at, with GDP slump projected to be as high as 45% for the quarter and 5% for the entire financial year.

In many ways, India’s response seems to pale in comparison with those of other countries, even against ones that did not impose as widespread a lockdown as India did. Countries like the USA and UK have been focusing on saving jobs and keeping demand from collapsing. The US is giving a one-time $1,200 cheque to every adult earning up to $75,000, plus $500 for every child they have. This is estimated to benefit around 90% of the households in the country. Similarly, the UK Government has committed to paying 80% of salary for staff who are kept on by their employer, covering wages of up to £2,500 a month.

While a like to like comparison is of course not possible, and the lack of formalisation in the Indian economy certainly makes it difficult for the government to implement a stimulus package as effectively as it is done in the developed world, the idea of the above comparison is to highlight the wide difference in the quantum of support. In the note linked here, we enumerate the different measures announced by the Finance Minister and analyse the likely impact of each measure on India’s immediate economic recovery, while highlighting potential challenges in implementation.

Access the detailed analysis here