Will Modi govt announce another stimulus package?

Fitch said COVID-19 is still in India and it is very likely that the government will have to spend a bit more on fiscal measures to support the economy.

India is very likely to come out with another round of fiscal stimulus package, worth about 1 per cent of GDP in the coming months, Fitch Ratings said on Monday.

Fitch, which last week lowered India's sovereign rating outlook to negative from stable, said it has factored in the outgo for additional fiscal stimulus while deciding on the rating action.

Fitch director sovereign ratings Thomas Rookmaaker said COVID-19 is still in India and it is “very likely” that the government will have to spend a bit more on fiscal measures to support the economy.

“In our forecast we have factored in a larger stimulus package, not just 1 per cent of GDP of fiscal measures that have been announced so far.

“You may recall that Prime Minister Narendra Modi announced 10 per cent of GDP as measures, but 9 percentage points were non-fiscal in nature.

“There was also an announcement of bond issuance, borrowing requirement of government and that was 2 percentage points of GDP.

“That could give an indication that another 1 percentage points could come in the months ahead to provide relief for those who need it,” Rookmaaker said while addressing a Fitch Ratings webinar.

The Rs 21 lakh crore economic package announced last month, includes government measures and RBI liquidity.

The central government has also raised the estimated gross market borrowing to Rs 12 lakh crore from Rs 7.8 lakh crore as per the Budget Estimates for 2020-21.

Fitch has projected India's economy to shrink by 5 per cent in the current financial year.

It expects growth to rebound, to 9.5 per cent next year, mainly due to low base.

The international rating agency expects the potential GDP growth rate of India in the medium term to be a “little bit” lower than the previous estimate of 6.5-7 per cent.

“The medium term growth outlook will come down a little bit. But it is too early to say by how much.

“We will know more by the situation in financial sector, when the moratorium (on loan repayment) gets lifted, where the financial sector basically is after the pandemic,” he said.

Fitch said while reforms will help boost growth going ahead, it would depend on the impact of COVID-19 pandemic on businesses and financial sector.

“The question is to what extent the businesses and financial sector is scarred by pandemic.

“The SMEs have been hit by a number of shocks in the past couple of years and the big question is to what extent the financial sector will be able to perform the role as supplier of credit and facilitate GDP growth,” Rookmaaker said.

The recent border issues with China do not impact the credit profile immediately, he said, adding “but the question is to what extent will the government be distracted by these kind of developments in delivering reforms”.