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Eco Emerging

Limited resources to combat the pandemic
04/13/2020 • By Johanna MELKA

India was not spared the coronavirus pandemic. The economic slowdown will be all the more severe with a protracted lockdown of the population. The government also lacks the fiscal capacity of the other Asian countries to bolster its economy. Already strained by the economic slowdown of the past two years, public finances are bound to deteriorate further. Public debt could reach 75% of GDP by 2022. Refinancing risks are low, but the cost of borrowing could rise for the long term if the rating agencies were to sanction its public debt and deficit overruns. India still has sufficient foreign reserves to cover its short-term liabilities.

Eco Emerging

Gloomy prospects
01/27/2020 • By Johanna MELKA

India’s real GDP growth remains far below its long-term potential, and economic indicators do not suggest a significant turnaround in the short term. The government has little manoeuvring room to stimulate the economy. In the first eight months of the fiscal year, the budget deficit already amounted to 115% of the full-year target, and the central bank must deal with rising inflationary pressures, which are hampering its monetary easing policy (which is not very effective anyway). The prospects of materially lower economic growth has led the rating agency Moody’s to downgrade its outlook to negative. Yet it is the financing of the economy as a whole that is at stake.

India is the world’s largest democracy with a population of more than 1.4 billion, but only the eighth country in emerging Asia in GDP per capita (on a purchasing power parity, or PPP, basis), just above Vietnam. Indeed, while Indian economic growth has averaged 6.7% over the period 2015-2019, real GDP per capita has increased by only 5.6%.

The Covid-19 crisis did not spare India, and like many of the emerging economies, the country’s economic and social situation has deteriorated sharply. India recorded its first recession since the fiscal year 1979/1980. However, India’s situation had already begun to deteriorate well before the onset of the pandemic, which only accentuated the country’s weaknesses. The very sharp contraction in GDP triggered by the Covid-19 pandemic highlights the economy’s structural vulnerabilities, especially the large number of workers without social protection. The fragility of India’s banking and financial system is hampering economic growth even though banks are more solid than they were five years ago. Meanwhile, public finances are weak and the government’s fiscal room for manoeuvre to support economic growth or face a new shock is tiny.

On the political front, the Modi’s government, elected for a second term in May 2019, managed to adopt key economic reforms to support medium term economic prospects in fall 2020. However, their implementation is still problematic.