India’s Announced Fiscal Support Is Less Than Meets The Eye But Helpful To The Most Vulnerable – Small Firms

LaIndiaIndia ́s liquidity situation remains good, with international reserves at almost eleven months of import cover in 2022, amply covering both the external financing requirement and short-term foreign debt. India has an excellent payment record, with no missed payments since 1970, providing it with good access to capital markets.

Trinh D. Nguyen (Natixis) | In response to this, the government announced the first round of stimulus of 0.8% of on-budget cash-handouts to help vulnerable population cope. Additionally, monetary easing also helped through broad and targeted measures.

Recently, the government unveiled a 10% of GDP support and announced some of the details yesterday. A closer analysis of the 10% stimulus shows that it includes previous measures that amounted to 0.8% of GDP for fiscal and monetary policy easing, which the government counted as 3.8% of GDP. The new measure is about 2.3% of GDP that includes SME non-collateralized loans guaranteed by the government, support for power distribution companies and relief for shadow banking. That means that we have about 3.1% of GDP left to be unveiled.

We argue that the actual fiscal impulse is much smaller than counted due to the discretionary nature of bank loans and monetary support that requires banks to be willing to have the risk appetite to lend. That said, the support for small Indian firms through government guaranteed unsecured loans means that it is targeting the back-bone of the Indian economy (80% of employment is in SMEs), which is helpful.

Given the limited support so far and the bulk of it discretionary in nature, we do not think the stimulus is proportional to the fall of demand and expect GDP to fall by -2% in 2020 and bounce back in 2021 to 5.2%.

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