India’s economic pick-me-up earns half marks

Cash-strapped New Delhi presented a hard-nosed approach favouring easier access to corporate credit over handouts

  
A policeman stands guard at the entrance of the Reserve Bank of India (RBI) headquarters in Mumbai, India, April 4, 2019.

A policeman stands guard at the entrance of the Reserve Bank of India (RBI) headquarters in Mumbai, India, April 4, 2019.

REUTERS/Francis Mascarenhas

MUMBAI - India’s economic blueprint is too farsighted. Prime Minister Narendra Modi has addressed some of the immediate pain by expanding a rural employment scheme to provide work for those fleeing cities and suspending fresh insolvency cases. Much of the $277 billion plan, however, is devoted to longer-term reforms. That only deserves half marks considering the pandemic-related anguish.

Final contours of a five-part package, equivalent to about 10% of GDP, were rolled out on Sunday. Central bank initiatives, unveiled previously, account for just under half the sum. The rest involves the government paying its bills, and an upfront fiscal outlay of barely 1% of India’s output, according to HSBC economists.

Under the circumstances, cash-strapped New Delhi presented a hard-nosed approach favouring easier access to corporate credit over handouts. It will push spending onto state enterprises and raise its own potential future liabilities by indirectly guaranteeing loans for small companies and fragile non-banks. There are no big bailouts for the most-troubled aviation and tourism industries.

The bigger emphasis is on restructuring to help finance the future. New rules will address inefficiencies in agriculture, a sector accounting for half the workforce but less than one fifth of GDP. Farmers will soon be able to move produce between states, sell more of it at prices they choose and bypass greedy middlemen. That’s a welcome effort to empower some of the country’s poorest.

A promise to privatise non-strategic companies and allow foreign investors to take control of aerospace and defence ventures would be giant steps in ordinary times. And in potential good news for tech startups, Indian companies will be allowed to list overseas without doing so first at home. States also can borrow substantially more if they make changes such as cutting out red tape for businesses.

If this broad national overhaul is well-executed, growth might eventually roar back. Modi’s prudence, however, places a terrible burden on people and businesses enduring one of the world’s strictest lockdowns. GDP will contract 5% in the year to March 2021, similar to its deepest “recession”, Goldman Sachs forecasts. With new virus cases likely to be far from a peak, India could easily have to spend quite a bit more sooner.

CONTEXT NEWS

- Indian officials said on May 17 the government would privatise state-run companies in non-strategic sectors and stop fresh bankruptcy proceedings for one year as it unveiled the final contours of an economic support plan.

- Details have been announced daily by the finance ministry since Prime Minister Narendra Modi’s May 12 promise of a package worth 20 trillion rupees ($264 billion), 10% of GDP, in the wake of the coronavirus. The final total amount outlined was 21 trillion rupees.

- The country will remain in lockdown until May 31, with some relaxations, the home ministry added on May 17.

(Editing by Jeffrey Goldfarb and Sharon Lam) ((una.galani@thomsonreuters.com; Reuters Messaging: una.galani.thomsonreuters.com@reuters.net))

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