Second Round Of Fiscal Stimulus Measures Won’t Impact Post Pandemic Recovery: Moody’s Reports

Moody's
Moody's

Credit rating agency Moody’s said that the second round of fiscal stimulus measures that the government announced on 12th October will put the country’s credit-negative fiscal constraints up to focus and will limit the growth of the economy. Moody’s commented on its feelings over the government’s decision on October 14.

Finance Minister of India, Nirmala Sitharaman had unveiled the second round of fiscal stimulus measures which is of estimated $ 6.4 billion, or about 0.2 percent of our real Gross Domestic Product (GDP) forecast for FY21. Moody’s said on the government’s decision, “Notwithstanding the fiscal prudence of the measures, the small scale of the stimulus highlights limited budgetary firepower to support the economy during a very sharp contraction, a credit negative.”

This new stimulus measures taken up by the government would also include features like cash payments to government employees and interest-free loans to states. This is done with an aim to increase the capital expenditure of the country and also to boost consumer spending during the upcoming festive season. Moody’s also said, “While the latest stimulus will spur consumer spending over the near term as coronavirus-related restrictions continue to be eased and India’s festive season begins, the support to growth will be minimal.”

In the latest package that the government declared, Leave Travel Concession (LTC) cash voucher scheme will make cash payments to all the public sector employees and private sector employees to whom the scheme is applicable, instead of annual leave encashment and travel reimbursements. However, the recipient of the voucher can only make purchases on goods that are subject to a consumption tax of at least 12 percent. Also, the government also announced that the Special Festival Advance Scheme will offer Rs 10,000 interest-free advances to central government employees.

Moody’s commented, “Even when combined with the government’s fiscal stimulus earlier in 2020, the size of the measures remains modest. In total, the two rounds of stimulus bring the government’s direct spending on coronavirus-related fiscal support to around 1.2 percent of GDP. This compares with an average of around 2.5 percent of GDP for BAA-rated peers as of mid-June.”

According to the credit rating agency, India currently has a “very weak fiscal position”. The new measures taken up by the government has limited its way for discretionary stimulus spending in response to the economic impact of the COVID-19 pandemic. The agency also said that they expect a hike in the country’s debt burden. The estimated ta rise up to 90 percent of their GDP of depth burden in 2020, in perspective to around 72 percent of last year. They also noted that this figure of the expected rise of debt burden is higher than the Baa median of 59 percent.

As the markets open up from the pandemic laden situation, the agency forecasted India’s growth to rebound to 10.6 percent and expects the growth to settle around 6 percent in the medium term. The company also holds the view that if the government can implement the reforms related to labor and the agricultural sector successfully, it could support medium-term growth.

About Moody’s:

Moody’s Investors Service which is also referred to as Moody’s acts as the bond and credit rating system of Moody’s Corporation and represents the traditional line of business of the company in which they are a legendary name. The agency, Moody’s Investors Service, provides international financial research on bonds issued by commercial and government entities. It is also one of the three in “The Big Three Credit Rating Agencies”. The other two beings, Standard and Poors and Fitch Group.

John Moody in 1909 founded the corporation “Moody’s” and aimed to produce manuals of statistics related to stocks and bonds and bond ratings. Then in 1975, they were identified as a Nationally Recognized Statistical Rating Organization (NRSRO) by the U.S. Securities and Exchange Commission. After several years of ownership by Dun & Bradstreet, Moody’s Investors Service became a separate company in 2000. The company has their headquarters in New York.