Latest stimulus to have minimal impact on growth, a credit negative: Moody’s

The ‘small scale’ measure reflects the country has ‘limited budgetary firepower to support the economy,’ says the rating agency

The government’s latest fiscal stimulus measures will have a minimal impact on India’s growth prospects, rating agency Moody’s Investor Services said on Thursday, stressing that their ‘small scale’ is actually a credit negative as it reflects the country has ‘limited budgetary firepower to support the economy’.

On Monday, Finance Minister Nirmala Sitharaman announced a leave travel cash voucher scheme and an interest-free festival advance of ₹10,000 for all Central government employees, to spur consumer demand. She also announced a ₹ 25,000 crore enhancement in the Centre’s capital spending and a 50-year loan facility worth ₹ 12,000 crore for States to expand capex.

Moody’s expects India’s GDP to drop 11.5% in 2020-21, so the 0.5% of GDP gain expected by the government from these stimulus measures will provide only ‘a small boost’, it pointed out. The package amounts to a fiscal cost of 0.2% of real GDP this year, as per the rating agency.

“Notwithstanding the fiscal prudence of the measures, the small scale of the stimulus highlights limited budgetary firepower to support the economy during a very sharp contraction, a credit negative…. India’s very weak fiscal position has constrained its scope for discretionary stimulus spending in response to the coronavirus shock,” Moody’s observed.

Baa rating

“Even when combined with the fiscal stimulus earlier in 2020, the size of the measures remains modest. In total, the two rounds of stimulus bring the government’s direct spending on coronavirus-related fiscal support to around 1.2% of GDP. This compares with an average of around 2.5% of GDP for Baa-rated peers as of mid-June,” the firm said in a note. The average fiscal stimulus of 13 Baa-rated nations was calculated from the International Monetary Fund’s database of fiscal policy responses to COVID-19, for this comparison.

India’s rating is Baa3 negative as per Moody’s, following a downgrade this June from Baa2 negative. The country’s policymaking institutions will be challenged in enacting policies that effectively mitigate the risks of a sustained period of relatively low growth, significant further deterioration in the general government fiscal position and stress in the financial sector, the agency had said in its rationale for the downgrade.

Low consumer confidence

Consumer confidence, the agency pointed out, has remained subdued even as India has emerged from a very stringent nationwide lockdown, which drove a 24.5% year-on-year contraction in private consumption in the April-June quarter.

“The number of coronavirus cases in India is still elevated and the relaxation of restrictions on educational establishments, entertainment facilities and gatherings from 15 October raises the risk of spread, which could weigh further on consumer sentiment,” it said.

While Moody’s has forecast growth to rebound to 10.6% in 2021-22, due to base effects and a gradual normalisation in economic activity, it expects growth to settle around 6% over the medium term, with downside risks that partly arise from ‘ongoing stress’ within India’s financial system.

Debt burden

Despite stimulus measures till date being about half of it similarly rated peer countries, Moody’s expects general government debt burden to peak at around 90% this year, from 72% in 2019-20. This, it said, is significantly higher than the median of 59% for Baa-rated countries.

“In fiscal 2020, we expect weaker government revenue, driven by the economic contraction and reduced corporate tax rates announced in September 2019, to widen the general government deficit to around 12% of GDP,” Moody’s said. India’s general government debt on March 31, 2019 was 6.5% of GDP.

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