The magic number of 10.5 percent in 2021-2022 remains unchanged. Focus will be on strengthening macro-economic stability and opting for fiscal discipline to announce a large stimulus to spur consumption demand.

The Modi government had responded to the economic stress caused by the first wave of the Covid-19 pandemic by announcing a huge $265-billion stimulus-cum-reforms package. Now, with the second wave of Covid some analysts have begun a chorus for another stimulus package.

Responding to a question on the issue, Dr Rajeev Kumar, Deputy Chairman of NITI Aayog, the government’s official think tank, said a decision on this will be taken only after detailed analysis of the situation by the Ministry of Finance.

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The big question is: Is there a case for a fiscal stimulus package? And if yes, does the government have the fiscal space to announce such a package?

MPC expects nascent economic revival to sustain

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) recently left the repo and the reverse repo rates, the benchmark for bank lending and deposit rates, unchanged. This means it does not foresee a slowdown in demand. This is corroborated by the fact that the panel indicated that the recovery seen in the economy is at a nascent stage and expected to sustain through the year.

“It (the MPC) also unanimously decided to continue with the accommodative stance as long as necessary to sustain growth on a durable basis and continue to mitigate the impact of Covid-19 on the economy, while ensuring that inflation remains within the target going forward,” RBI Governor Shaktikanta Das said in a press statement.

Reading between the lines of RBI chief’s statement

Since the government hasn’t said anything about a stimulus, the RBI statement has to be read for indicators of thinking in official circles.

The release goes on to say: “In the domestic economy, the focus must now be on containing the spread of the virus as well as on economic revival – consolidating the gains achieved so far and sustaining the impulses of growth in the new financial year (2021-22). A key aspect of this strategy will be to strengthen the bedrock of macroeconomic stability that has anchored India’s revival from the pandemic… Taking these factors into consideration, the projection of real GDP growth for 2021-22 is retained at 10.5 per cent consisting of 26.2 per cent in Q1; 8.3 per cent in Q2; 5.4 per cent in Q3; and 6.2 per cent in Q4.”

Second wave of Covid will not affect economy too much

The point that catches the eye immediately is the headline GDP growth forecast – which has remained unchanged. This means the RBI expects the second wave of Covid-19 to pass without causing too great a damage to the economy.

The production and distribution disruptions as a result of state-wide or localised lockdowns, therefore, are expected to have only a minimal impact on the economy.

“I do think given the predictions that are being made by many epidemiological researchers that the pandemic (peak) should not extend beyond May, based on that we have done some internal assessments. I think that the impact actually may not be very large (on the economy),” Chief Economic Adviser K V Subramanian said last week.

Pace of vaccinations hold the key

The pace of vaccinations will hold the key to minimising the hit to the economy. An HSBC Securities & Capital Markets India research paper notes: “The growth cost of these (Maharashtra and Delhi) lockdowns could be 1 per cent of the country’s GVA in the June quarter and could rise further, if they are extended or replicated by other states… A scenario analysis suggests that, if India manages to gradually ramp up vaccine supply and the vaccination rate rises from 3 million doses/day now to about 5 million doses/day by August, it could cover about 50 per cent of the population (two doses/person) by the end-2021.”

No fiscal room for a stimulus

In the light of RBI’s “strategy… to strengthen the bedrock of macroeconomic stability that has anchored India’s revival from the pandemic”, some economists feel there may not be any need for a fiscal stimulus right now.

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Given the fiscal deficit of 9.5 per cent of GDP in the previous year and the target of 6.8 per cent in the current fiscal, there is little headroom for the government to provide any meaningful demand-side stimulus to spur consumption demand.

As the RBI notes, the focus will remain on infrastructure building as empirical evidence from across the world shows that it is the most effective way of kick-starting economic growth and demand revival.

Targeted schemes more likely

The Central government, however, will distribute 5 kg grains (rice or wheat) free of cost to 800 million beneficiaries of the National Food Security Act over and above their regular quota in May and June 2021. This will cost the national exchequer about $3.6 billion.

If the pandemic curve does not flatten by the end of May, the government may extend this scheme or launch a similar initiative targeted at the neediest sections of the population.

But given the right fiscal situation and the expectation that the second wave of Covid-19 will not really impact the economy has badly as the first wave, economists and policy makers don’t expect the government to come out with a fiscal stimulus package a la last May.