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Sunday, April 18, 2021

Why India did not announce a massive COVID relief package like USA?

India in response to the Covid 19 and lockdown impact on the Indian Economy announced a stimulus package that is worth 1.7 lakh crore. However, the package announced by the Finance Minister Smt. Nirmala Sitaraman pales in comparison to the package announced by the US Congress. USA announced a package worth of USD 2 trillion dollars which is almost 10% of its GDP. The Indian Stimulus package is only 0.8% of India’s GDP. Taking a clue from this, and amind Prime Minister Narendra Modi’s address to the nation on Tuesday the Congress on Monday sought a comprehensive economic package saying it should be at least five per cent of the Indian GDP.

Speaking at a party breifing, INC senior leader Anand Sharma stated the first package was just one per cent of India’s GDP.

“The US announced a package that was 10 per cent of its GDP, France and the UK have announced 15 per cent of their GDPs as packages. India should give not less than 5 per cent”

But India has taken extreme caution to draft a stimulus package that does not be a burden on the India’s kitty bank. Even during the times were normal, when FM introduced budget in parliament in Feb 2020, she had chosen to create a fiscally conservative budget. Even the 2019 budget was considered a fiscally prudent one. It had targeted a fiscal deficit of 3.3% of GDP for financial year 2020, revised down from the interim budget’s goal of 3.4%. The conservative stimulus package is created as an extension of India being fiscally prudent. The reason is only developed countries have the privilege of being fiscally non conservative in times like a virus pandemic of this size. You can see this conservative trend in other South Asian countries.

Why India did not announce a massive COVID relief package like USA?
Vegetable vendors selling their produce in a Indian town market.

While acknowledging the lock down in his country will be disastrous for millions of poor in his country,  President Imran Khan created a stimulus package of Rs. 1.2 trillion. Similarly Afghanistan announced $25 million to meet the immediate expenses and the Bangladesh allocated 2.5 billion Takas to the Health Services Division. All these allocations pale in comparison with how USA responded. Why? The simple answer is It is very expensive to be a developing country. Any irresponsible borrowing a developing country does, will have a serious consequences down the economic timeline. Further borrowing will become expensive, If investors lose confidence in Indian Rupee, it will lead to devaluation in Indian rupee. This will increase the imports bill and impact India’s current account and foreign reserves. In a nutshell, below is the summary of why India only chose a lockdown but not a money package like USA.

Why India did not announce a massive package like USA?
Why India did not announce a massive package like USA?

As Penny MacRae points out in her telegraph article, “A cut in India’s barely investment grade sovereign rating coupled with a loss of investor confidence could lead to the rupee, already at record lows against the dollar, to plummet which could mean a massive hike interest rates to shore up the currency that would be counterproductive for vital investment.”

As Ruchir Sharma pointed out in his TOI article, Getting India back to work: Developing countries need different strategies than nations with fully functioning welfare states, He points out Argentina and Venezuela. He appreciated the Indian policy makers for resisting calls from members of the business community and some economists, to print money like the same way developed developed countries. He says this advice is a careless one and is given with out a basic misunderstanding of how global markets punish emerging countries for profligate spending. Since the Covid pandemic started, Indian rupee started to lose it value to an unprecedented levels. This is not because of weakness in Indian rupee but Investors tend to flock to buy US dollars in times of crisis. This increases the demand for US dollar. If India shows any signs of borrowing more to create a stimulus package, Investors punish Indian rupee further and this will have deep and long term consequences on Indian Economy.


USD vs INR Last one year trend
USD vs INR Last one year trend

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