COVID Budget: Separate heads for departments

Policymakers have been holding discussions on length for an independent COVID-19 budget. The projected cost of combatting the economic, social, and health aftermath of the pandemic could lead to a sharp spike in the fiscal deficit for FY21. A government source with knowledge of the matter said that discussions have been held on about the spending involved. He also said that no final decision has been taken as the government is researching new ways to face the COVID-19 disease and its impact on the economy.

It has been unanimously agreed upon that budget restrictions should not stand in the way of an impetus as the economy faces grave challenges with some experts projecting a decline or shrinkage in FY21. 

Some of the departments have been busy adding a new COVID-19 account head to keep track of spending induced on countering the disease and the effects of the resulting lockdown. After the finance ministry announced expenditure curbs everywhere, such spending on COVID has been prioritized. 

The government of India has declared a Rs 1.7 lakh crore program to reduce the privation caused during the lockdown to vulnerable groups. The program includes distribution of free rations, cooking gas and cash transfers. In contrast, some of the countries have declared bigger packages to support their economies amidst lockdown (US is about 10% of GDP). 

The lockdown that started on March 25 is scheduled to hopefully end on May 3. Nothing can be said with much confidence yet as the number of cases is consistently on the rise despite measures. Economic activities have been resumed from April 20 in the areas not too harshly affected. 

Nirmala Sitharaman, our Finance minister, met the Prime Minister on Thursday to finalize the outline of the second COVID-19 economic bundle. A separate COVID budget would help prevent a rehearsal of the post-2008 situation when a fiscal stimulus to counter the impact of the global financial crisis was not rolled back in time. The fiscal deficit increased from 2.7% of GDP in FY08 to 6% in FY09. The country subsequently saw high inflation along with an expansion of the current account deficit. 

The IMF has limited India’s growth at 1.9% in the current year. However, there are some private institutions that made more horrid predictions. Nomura has predicted a direct output loss of over 8% of GDP during the 40-day period. This will happen for more than 75% of the economy. This will depend on the magnitude to which the government is ready to temper the lockdown from April 20 onwards. Withdrawing restrictions partially might also prove to be tricker practically than on paper.

Furthermore, we can also expect some indirect effects such as the continuing public fear, impacted livelihoods of the unorganized workforce, and the increasing stress of the corporate and banking sector. These will likely weigh on growth beyond Q2 in H2 2020. Nomura expects GDP growth of an average of -0.5% in 2020 versus 5.3% in 2019.

Sourced from The Economic Times.