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Another dose of stimulus needed to accelerate growth: Report
The suggestion by audit and consulting firm EY India in the latest edition of Economy Watch comes on the heels of the IMF’s World Economic Outlook update released on Tuesday that slashed India’s growth forecast for FY-22 to 9.5% from 12.5%, projected in April
The magnitude of direct fiscal stimulus announced in June this year was limited and it should be supplemented with another dose of stimulus later in the year to boost the economy, audit and consulting firm EY India said in the latest edition of Economy Watch.
The suggestion came close on the heels of the International Monetary Fund’s (IMF) World Economic Outlook update released on Tuesday that slashed India’s growth forecast for FY-22 to 9.5% from 12.5%, projected in April. IMF cites the severe second wave of Covid-19 pandemic during March-May, and expected slow recovery in confidence from that setback as the reason for slower growth.
Most of the professional forecasters also reduced their growth projections for India. Last month, global rating agency S&P lowered India’s GDP growth forecast to 9.5% in the current fiscal year compared to its prediction of 11% in March, which was just before the second wave.
Unlike the first wave last year, when all of India was under a nationwide hard lockdown as part of the 68-day lockdown since March 25, 2020; this year, there was no nationwide lockdown in April and May due to the second wave, which meant less disruption in business activities.
On June 4, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) projected a 9.5% growth for FY22, down from its previous forecast of 10.5%. It, however, projected better performance of the economy from the third quarter. According to the RBI projection in June, the economy is expected to grow at 9.5% in 2021-22 with a quarterly path of 18.5% in Q1; 7.9% in Q2; 7.2% in Q3; and 6.6% in Q4. Its previous estimate was 26.2%, 8.3%, 5.4% and 6.2%.
The MPC noted that the second wave of Covid-19 has altered the near-term outlook, necessitating urgent policy interventions. “At this juncture, policy support from all sides – fiscal, monetary and sectoral – is required to nurture recovery and expedite return to normalcy,” it said.
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Later on June 28, finance minister Nirmala Sitharaman announced a ₹6.28 lakh crore economic stimulus and relief package as the second wave of the pandemic ebbed and several states eased restrictions on movement and business activities.
Referring to the first stimulus package in the current financial year, the EY India report said: “The thrust of this package was to stimulate the sagging growth in credit offtake mainly by providing interest rate concessionalities with a focus on priority sectors such as health, power and other infrastructure sectors.”
Although the package will benefit micro, small and medium enterprises (MSMEs), small entrepreneurs in the contact intensive sectors such as tourism stakeholders, the direct stimulus was, however, limited to mainly three initiatives totalling ₹1.18 lakh crore, it said.
These are distribution of free food grains under the Pradhan Mantri Garib Kalyan Yojana (PMGKY) with an estimated cost of ₹93,869 crore, additional health sector expenditure amounting to ₹23,220 crore in which the Centre’s share would be ₹15,000 crore and an additional expenditure of ₹19,041 crore spread over two years for improving rural connectivity through expanding BharatNet, it said.
“Considering half of this amount as pertaining to the current fiscal year, the total additional burden on the FY22 budget from these three initiatives would be ₹118,390 crore. This amounts to about 0.5% of estimated GDP [gross domestic product] for FY22,” it added.
EY India chief policy advisor DK Srivastava said, “Although this is a limited magnitude of direct stimulus, it would be desirable to follow it up with another dose of stimulus later in the year. In addition, government would do well to ensure that the budgeted capital expenditure for FY22 is spent in the earlier part of the financial year so as to generate benefits of frontloading of expenditures.”
