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November 12, 2020


INDIA: Stimulus and hopes of a vaccine amid the threat of rising prices

BY Aditi Phadnis

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Finance Minister Nirmala Sitharaman announced a new stimulus package on Thursday, 12 November that includes tax relief on select home sale deals, an enhanced credit guarantee program for small businesses, and incentives for new job creation as crucial elements. Big business found the new package underwhelming, as it had little by way of direct tax breaks or incentives for them. The government kept its promise of rolling out a stimulus in tandem with a vaccine for Covid-19 amid reports that it would be ready for distribution as early as December or January.

The stimulus is expected to go down well ahead state assembly elections in Tamil Nadu, Puducherry, Assam, and West Bengal due in May next year. Except Assam, the ruling Bharatiya Janata Party (BJP) has little or no political presence in these states. Together, the states constitute just under 20% of the lower house of Parliament.

The additional stimulus amounts to about INR 9tn (USD 120bn), taking the nation’s total virus relief to almost INR 30tn (USD 402bn), or 15% of gross domestic product. The package comes as India’s economy officially slipped into recession after GDP declined for a second-straight quarter in Q3. The latest data showed some signs of revival, though admittedly from a low base. This round of stimulus is aimed at the sectors that were hurting most as a result of Covid-19: tourism, real estate, auto component manufacturing, and small- and medium-sized businesses employing less than 1000 people. A production-linked incentive program worth INR 1.46tn (USD 20bn) for manufacturing units was already approved by the government earlier this week.

The government’s biggest concern now is that India is showing signs of inflation amid rising food prices. If this trend continues unchecked, it could wipe out the positive sentiment created by the stimulus, especially among low-income groups, and affect electoral outcomes. While the daily growth of Covid-19 cases has slowed, the toll it has taken on the economy and livelihoods remains high. India continues to be the second-worst-affected nation in the world after the US with over 8.5 mn cases. Indians generally have been appreciative of the federal government’s efforts in fighting the pandemic. This was reflected in the recently concluded elections to the Bihar assembly that were won decisively by the BJP in alliance with other parties. But voters could change their minds if food prices begin to rise.

Sitharaman is confident that there is new buoyancy in the economy that goes beyond merely pent-up demand. This assumption is the pivot of the stimulus. But if this assessment is wrong, then the stimulus could be a wasted intervention with precious money being thrown at a sinking economy.

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