IMF's Gopinath cautions against tightening of policy support amid pandemic

IMF's Chief Economist Gita Gopinath on Thursday said it would be damaging for India to start tightening policy support in the midst of the COVID-19 pandemic and also stressed on reducing wasteful expenditures in the upcoming Budget.

Delivering NCAER's '9th C D Deshmukh Lecture' virtually, Gopinath said there is scope for the Indian government to provide more direct support to people.

"It would be damaging (for India) to start tightening of policy support in the midst of the pandemic," the chief economist of the Washington-based global financial institution said.

She said India should come out with a credible medium-term fiscal plan that can be achieved once the pandemic ends.

Noting that India's debt-to-GDP ratio has gone up to 85 per cent, Gopinath said the country's banking sector is vulnerable due to rise in bad loans during the pandemic.

According to RBI's Financial Stability Report, gross NPA of banks may rise to 13.5 per cent by September 2021 from 7.5 per cent a year ago.

"There is lots of wasteful expenditure done in the Budget," she said, adding that steps need to be taken for a more effective Goods and Services Tax (GST) collection and more credible disinvestment plan.

The Union Budget for 2021-22, the eighth Budget of the Prime Minister Narendra Modi-led government, is scheduled to be presented in Parliament on February 1, 2021.

Finance Minister Nirmala Sitharaman will be presenting her third full-time Budget.

The Budget for FY22 will come in the backdrop of an economic contraction of 7.7 per cent, the first time in the history of independent India.

India is doing an ambitious vaccination drive, Gopinath said, adding MNREGA will be useful this year also as the pandemic has hit women more than men.

She also pointed out that India has relied heavily on indirect support measures, including loans, equity and credit guarantees during the pandemic.

"So, there is scope for India to provide more direct support to Indians," she opined.

The government's Rs 29.87 lakh crore stimulus package, spread over five announcements, included Rs 12.71 lakh crore of liquidity boosting measures by the Reserve Bank of India (RBI).

Gopinath further said the collapse of the global economy in 2020 due to COVID-19 pandemic was much more severe than the Global Financial Crisis (GFC).

"Many countries provided income support during the lockdown, so people were able to spend when the lockdown was removed," she added.

Noting that the global goods trade has come back more quickly than expected, she said, "Now, we have to explore how to bring back jobs."

The IMF had on Tuesday projected an impressive 11.5 per cent growth rate for India in 2021, making the country the only major economy to register double-digit growth this year amid the coronavirus pandemic.

Replying to a query on India's 2021 economic growth number, Gopinath said, "The 11.5 per cent growth in 2021 comes from a severe collapse that happened in 2020 (-8 per cent). A lot of it is pretty mechanical."

"One should remember that over two years, India will only grow at 2-3 per cent rather than the usual growth of around 12 per cent," she added.

Photograph: James Lawler Duggan/Reuters