India’s fiscal responses need to overpower the COVID-19 disruption

India falls on 9th rank, with emerging countries such as China, and Brazil being more aggressive in fiscal
reforms to deal with the impact of COVID 19.

In order to mitigate the impact of the pandemic on the economy, Indian government undertook a
multitude of fiscal responses. To prevent the rise in jobless citizens, MNREGA scheme was expanded to
incorporate more people under the policy. Under the Atmanirbhar Bharat package, in May 2020 around
140,000 crores people were incorporated under the scheme.

To support the agriculture sector, the government introduced measures to improve the farmers'
income, ensure remunerative production and boost the infrastructure. The livelihood of the impacted
people has been supported through free food distribution under the Public Distribution System (PDS).
The PMGKY Yojana extended grains for free to the individuals with ration cards under the NFSA. Direct
cash transfers were made under Jan Dhan to provide income support. Boosting consumption and
investment specifically has also been focused with measures such as extending the fund for capital
expenditure and the festival advance scheme.

As per the Economic Survey 2020-21, during May-November 2020, the Central government announced
fiscal measures focusing on boosting the agriculture sector, health sector, investment, demand, securing
the livelihood of people, improving liquidity and many more.
 Figure 1: Stimulus measures announced in response to the COVID-19 pandemic
Source: Economic Survey 2020-21

Performance of economy
The ongoing fiscal measures had proved to be effective in eradicating some impact of the pandemic but
not all. The unemployment rate rose sharply in April-June 2020, crossing 20% as the lockdown halted
the activities. After that, as the economy opened up, the unemployment rate started easing. However,
the second wave, again led to large number of job losses with the unemployment rate reaching 11.9 in
May 2021.

Source: CMIE database

Another indicator, IHS PMI index, shows the impact of the pandemic on the manufacturing activities.
The manufacturing activities contracted significantly in the first wave, with the PMI Index below 50
during April-July 2020. Manufacturing PMI index above 50 shows expansion in the manufacturing
activities while below 50 indicates contraction in the manufacturing activities in the economy. From
August 2020 onwards, the manufacturing activities started recovering with the PMI index above 50.
However, the second wave hit the activities hard with the index falling January onwards and dropping
below 50 in June 2021. The reasons have been the halt in growth of new production, decline in new
orders, and high input prices.
Source: IHS Markit

Commenting on the effect of fiscal responses, Nirmala Sitharaman, Finance Minister, said, "Astute
management of the lockdown and subsequent unlocking along with strengthened health infrastructure
was accompanied by roll out of Pradhan Mantri Garib Kalyan Yojana (PMGKY) and Atmanirbhar Bharat
(ANB) packages that besides saving lives also protected livelihoods and businesses. These measures,
amounting to Rs 29.87 lakh crores - equivalent to 15 per cent of India's GDP, have boosted consumer
confidence as their implementation advanced through 2020-21.”

India’s consumer confidence, low since 2019, indeed showed some improvement post May 2020 as the
economy started to open up. As per the results of Consumer Confidence Survey by RBI, the Current
Situation index has been negative since May 2019 and fell steeply in the first wave. Perception for the
future however improved post May 2020 but again declined in January 2021 onwards and reached
below 100 in May 2021.

Overall, India’s performance had been better than expected in 2020-21 as India’s GDP contracted by
7.3% in comparison to the projection of 8% by Asian Development Bank, owing to its faster recovery.
However, the positive picture has not continued in the FY 2021-22 as the second wave hit the economy.
According to the World Bank, India is expected to grow by 8.3% in FY22 instead of 10.1 % projected
earlier. The disruptions from COVID-19 require more policy actions in order for India to reach the pre
pandemic level.

India in comparison to other countries

When looking at India’s policy actions in comparison to other emerging countries, a report by Ernst and
Young shows that India’s fiscal policies have been less aggressive.
Country Index of fiscal response aggressiveness
Canada 1802
Russia 727.4
China 595.6
UK 387.2
United States 385.5
France 361.8
Brazil 355.8
Japan 338.9
India 286.4
Germany -2183
Source: India’s economic challenges resurface amidst the second wave of COVID-19, EY

India falls on 9th rank, with emerging countries such as China, and Brazil being more aggressive in fiscal
reforms to deal with the impact of COVID 19. China became the only major economy which showed a
positive growth in GDP in 2020. Brazil returned to its pre-pandemic level growth in GDP with the growth
of 1.2% in the first quarter of 2021, significantly supported by agriculture exports. Brazillian government
introduced the biggest stimulus among the emerging markets. Due to the support of fiscal and monetary
measures, Russia’s economy contracted by 3%, less in comparison to the world economy which
contracted by 3.8% in 2020.

India’s recovery requires stronger fiscal measures to curb the impact. Furthermore, the control of
COVID-19 cases through vaccination is all the more important.