India economic advisor Krishnamurthy Subramanian on potential fiscal stimulus

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India’s government will not rule out the possibility of further fiscal stimulus to spur consumption, the country’s chief economic advisor said Tuesday. 

The Indian economy shrank at its steepest pace of 23.9% for the three months from April to June. The country was under a national lockdown between April to May in an attempt to slow the spread of the coronavirus outbreak. Private consumption and investment demand collapsed as most nonessential activities were barred during the lockdown, leading to job and income losses and uncertainties that curtailed spending. 

“I would not rule that out especially given the festive season that is approaching in India, there may be a case for some incentives for durable consumption and some of the discretionary items,” Krishnamurthy Subramanian said on CNBC’s “Street Signs Asia.” He did not specify how much a potential stimulus package could be worth. 

Starting September, Indians typically celebrate several festivities including Diwali.

“Some of the services which are affected by social distancing – those may be a little more difficult given the uncertainty that people are still experiencing all over the world. But, given those constraints, still there is a case for a short-term stimulus around the festive season,” he added. 

Subramanian said that by his estimates, data indicated that the worst is over for India even as the country has one of the highest number of Covid-19 cases and reported deaths.

Non-local workers wear protective face masks as a preventive measure while in queue receiving aid from a local non-government organization during the lockdown. Indian Prime Minister, Narendra Mondi announced 21 day lockdown on 22 March across the country restricting the movement of people from stepping out of their home to curb the spread of the corona virus.

Idrees Abbas | SOPA Images | LightRocket via Getty Images

But government data shows there’s also a high rate of recovery from the coronavirus. While certain places in India are still conducting local lockdowns to fight the disease, Subramanian said it won’t affect future consumption as badly as the national lockdown did. 

“We do recognize that the fight against Covid may not just be a few months, and therefore we are actually coming up with calibrated response and will continue to do so,” he said. 

Fiscal policy has to do heavy lifting

To weather the effects of a national lockdown, the government implemented cash transfer schemes and announced a $266 billion support package containing both fiscal and monetary measures, said to be worth around 10% of India’s GDP. But economists previously said the package would do little to stimulate growth, as it included very little planned government spending and the benefits of several measures are expected to only be seen in the medium term.

For India to chart a sustainable path to recovery, fiscal policy “has to do the heavy lifting,” Priyanka Kishore, head of India and Southeast Asia economics at Oxford Economics, said Tuesday. 

“What we find is that (the government has) barely scratched the surface in terms of that,” she told CNBC’s “Squawk Box Asia.” 

Kishore explained that the government appeared to have an eye on its credit rating and what it had pledged in terms of fiscal consolidation — or policies aimed at cutting down government deficits and debt accumulation. Moody’s in June downgraded India’s rating to the lowest investment grade level. The government, however, already overshot its fiscal deficit target by a wide margin due to a loss of revenue, according to Kishore.

“I think the government should shift its focus a bit and focus more on how they can help growth rather than being very, very worried as they are about a rating downgrade to junk,” she said. “Because if you convince the rating agencies that you will get growth back on a sustainable path, they’ll probably be more lenient.”

For his part, Subramanian also said India will have to do what it takes to bring back growth and consumption.

Full-year growth

The quarterly decline reported on Monday was more than the 18.3% contraction economists polled by Reuters expected for the April to June quarter. It compares to the 3.1% growth in the prior three months ending in March. India’s numbers were also one of the worst recorded among Group of 20 countries, surpassing the 20.4% contraction reported in the U.K. 

India’s statistics ministry said the estimates are likely to undergo revisions in due course as the timeline for filing statutory returns was extended by most regulatory bodies. 

Economists said that once data from the micro, small and medium businesses sector, as well as less formal sectors, were counted, the contraction could be deeper in the revised data. 

Credit rating agency ICRA, the Indian affiliate of Moody’s Investors Service, maintained its prediction that the Indian economy will contract by 9.5% in fiscal 2021. Singapore’s DBS Group, meanwhile, lowered its full-year forecast from negative 6% growth previously to a 10.5% on-year contraction. 

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