International Monetary Fund (IMF) Chief Economist Gita Gopinath said India has the ability to increase on-budget spending to mitigate economic risks, especially for vulnerable households and small and medium enterprises. Her comments came during an exclusive conversation with India Today TV News Director Rahul Kanwal.
When asked about her view on India’s financial relief package, Gopinath said the package was substantial but lacks on-budget spending.
She said, “If you look at the aggregate set of measures including fiscal side, monetary side and the financial sector support, then it is quite substantial.”
“We think the measures being undertaken on the financial sector front, providing liquidity for NBFCs, HFCs and making credit available through risk mitigation measures on the banking side.”
However, Gopinath indicated that a large portion of the economic relief package was “below-the-line off-budget spending” as opposed to on-budget spending. Off-budget spending is the expenditure that is not funded by the government through the budget.
Several experts have said that off-budget spending does not provide the actual extent of government spending.
“India has done more on what we call below-the-line off-budget spending as opposed to on-budget spending as opposed to on budget spending. So 4.9 per cent GDP is below the line and 1.5 per cent is on-budget spending,” Gopinath said.
“Here we think that more can be done. India has the ability to do more in terms of on-budget spending, especially for very vulnerable households, for the poor and for small and medium enterprises,” she added.
Direct income support
The IMF chief economist also explained why the international body called for direct income support in context of India.
“This is a crisis where people, especially those in the very low income category, are basically are not being able to sustain basic spending. And that’s where the government has to play a role,” Gopinath said.
She went on to explained that direct income benefit for marginalised classes will have a multiplying effect on economic activity. “By putting income in the hands of those who really are on a hand-to-mouth basis, the impact on economic activity is quite substantial and positive,” she said.
Demand vs direct cash transfer
When asked whether the government’s strategy to boost demand as against providing direct cash transfer is viable, Gopinath explained that putting direct cash in the hands of people who have been affected is precisely a way of preventing demand from collapsing.
“So it (direct cash transfer) is a demand stimulus. You want to make sure that people can spend at this stage, at least on the most basic things that they need to spend on. And that is why it will have a positive effect on the economy.”
Why IMF downgraded India’s outlook sharply?
A few days ago the IMF sharply downgraded India’s growth projection for 2020-21 to minus 4.5 per cent from its earlier projection of 1.9 per cent.
When asked what promoted IMF to change India’s growth outlook so drastically, she cited two main reasons.
The first reason, she said, was the duration of the partial lockdown in India — it is longer than IMF had anticipated in April. Another factor that led to the change in outlook is the fact that the health crisis in India has not abated despite containment measures.
“Looking forward, we expect now a slower recovery with much more persistent social distancing to the second half of this year. So these are two of the main factors behind our downgrade,” she said.