There is more scope for more “urgent” policy actions in India as the economic toll from the coronavirus (COVID-19) pandemic is likely to be “large”, a top IMF official said, noting that the fiscal stimulus package unveiled by the government to mitigate the impact of the COVID-19 is a step in the right direction.
In an interview to PTI, Vitor Gaspar, Director of Fiscal Affairs Department of the International Monetary Fund (IMF), said the balance of risks is tilted to the downside, given the uncertainty surrounding the pandemic that has halted economic activities across the world.
“India has limited fiscal space, but also a need to support the health and economic well-being of its citizens. In the current exceptional circumstances, the need for policy action is urgent,” Mr. Gasper said when asked about India’s fiscal strength and the impact of the COVID-19 on its economy.
“The economic toll from the pandemic is likely to be large. We estimate that growth in the fiscal year 2020/21 will be reduced to 1.9%, reflecting both the domestic COVID-19 impact from the unprecedented national lockdown and weak external demand, he said.
In the face of the pandemic, which is likely to have devastating human and economic consequences, there is an urgent need for government action, including prioritising spending on health care, providing income support to those most vulnerable, and supporting micro, small and medium-sized enterprises (MSMEs), he said, on COVID-19.
“The measures taken to date — such as the provision of food and cooking gas to vulnerable households, as well as cash transfers to poorer households — go in the right direction and are a good start, Mr. Gasper said.
The Finance Ministry unveiled a ₹1.70 lakh crore economic package on March 26 involving free foodgrain and cooking gas for the poor for the next three months.
“To be candid, we see scope for additional spending in these areas, beyond what has already been announced, as well as a need to enact policies which support MSMEs who have been hit by the (appropriate) social distancing measures and nationwide lockdown, he added.
According to Mr. Gasper, in India, large, timely and targeted fiscal and financial sector measures are essential to shield vulnerable households and firms.
“The fiscal stimulus package is one step in the right direction. The package has appropriately included in-kind (food; cooking gas) and cash transfers to lower-income households; insurance coverage for workers in the healthcare sector; and wage support to low-wage workers, he said.
Similarly, a three-month moratorium was allowed for all term loans for banks and non-bank financial companies, as well as interest deferral for working capital loans, he said.
When asked about the specific measure India could take to save the economy, he said the IMF believes measures could be taken on fiscal, monetary and financial sector policies in the near term.
On fiscal policy, additional support is needed in the near term, including on health care and for small and medium-sized firms and vulnerable households, beyond the fiscal stimulus measures already announced, he said.
Over the medium term, though, substantial new measures will be needed to bring the deficit and debt back towards the Central government’s medium-term targets (deficit of three per cent and debt of 40% as a share of GDP), he added.
Monetary policy, he asserted, should maintain a strong easing bias to mitigate any sharp COVID-19-related slowdown and support the recovery, given the sharp slowdown in domestic and global activities, moderating inflation amid a wide negative output gap, and lower commodity prices.
Mr. Gasper said financial sector stress prior to COVID-19 constrained monetary transmission needs to be closely monitored.
Despite measures to improve liquidity conditions, including through temporary and partial guarantees, funding pressures persist, with implications for the recovery once the shock dissipates.
Exchange rate flexibility should continue to play the role of a shock absorber, while avoiding excessive volatilities, he said.
Experience from the COVID-19 pandemic shows that monitoring and containment costs are much lower than those of mitigation and treatment, he noted.
As such, it is very important to prevent the health systems from becoming overloaded. National governments should continue to allocate sufficient funds for sub-national governments to spend on health services or mobilise medical resources, Mr. Gasper said.
He said based on the experience from other countries affected by the COVID-19 pandemic, India’s proactive decision to pursue the nationwide lockdown for three weeks is an important step to contain the disease and save lives.
Stating that the support for health systems, including higher spending is needed, the IMF official noted that it is crucial to prioritise health spending for medical equipment and COVID testing; compensate doctors and nurses appropriately; and make sure that hospitals and makeshift clinics have enough personal protective equipment and resources to function effectively.
Emergency lifelines should be targeted to households to maintain basic needs and viable firms to prevent layoffs and exits from supply chains.
They should be made progressive to ensure that lower-income households benefit more. They should be cost-effective and embedded in medium-term budget frameworks, Gasper added.