India needs a strong fiscal stimulus

(Pulapre Balakrishnan, 15 April 2020)
India has seen among the most stringent prevention responses to the Coronavirus disease
(Covid-19) so far. It has hit the maximum in an index of stringency designed by the United
Kingdom’s Overseas Development Institute.
As economic policy in India following the onset of Covid-19 must address both the relief made
necessary by the lockdown and restoration of the level of activity after it is lifted, we may
consider these two aspects together, terming the overall response needed as “stimulus”. What
should the extent of this fiscal stimulus be? The level of the US stimulus may be taken as a
benchmark. Concerns have already been expressed that a stimulus in India should be
approached with caution as it has implications for the fiscal deficit. At 10% of GDP for 2019–20,
the stimulus would amount to approximately Rs 20 lakh crore. This may come across as a huge
figure.
However, it is actually quite close to the direct loss of GDP due to a month’s lockdown, estimated
as a 12th of annual GDP. If we are to take the multiplier to be 1.25, the final figure for loss due to
lockdown will exceed 20 lakh crore. So, with a fiscal stimulus amounting to 10% of GDP, we
would be no more than compensating for the economic shock that accompanied the lockdown.
Now, what of the implications for the fiscal deficit?
What are we to make of the estimated figure of 14% of GDP for the fiscal deficit implied by a
stimulus package of 10% of GDP? Well, as we are working with the figure for the US stimulus as
a benchmark, it may be mentioned that one published estimate of the deficit implication of the US
stimulus of two trillion dollars is that it will lead to a fiscal deficit of 14%. So, what is being
proposed here is not unheard of