What Happened

Indian Prime Minister Narendra Modi’s government has unveiled a fiscal stimulus package that will almost immediately nullify the 3.5 percent of GDP deficit target outlined in its new 2020-2021 budget, which was passed on March 23. The $22.6 billion package includes a number of measures such as direct payments to farmers and distributing cooking gas to the country’s poorest citizens. The package comes as Modi announced the country would go into a 21-day shutdown beginning March 24 to contain the spread of COVID-19 in India. 

Mitigating the Immediate Impact

Amid the escalating COVID-19 crisis, it's unsurprising that Modi's government has moved to abandon its budget deficit target, which was already overly optimistic in growth and revenue projections. The country's economic growth has continued to slow for the past six consecutive quarters, and a three-week shutdown due to the outbreak will only slow economic activity more. The level of impact of COVID-19 on India’s economy is highly uncertain, and the government’s estimate of a 0.3 to 0.5 percentage point hit to full-year growth may be conservative as other countries have seen economic forecasts get progressively worse as the heath crisis expands. 

After securing a second term in a landslide electoral victory in 2019, Modi's primary policy focus coming into 2020 was improving India's economic outlook. India’s growth had waned in recent quarters, and New Delhi had hoped to turn things around in the new year. Modi wants to ensure that the new COVID-19 threat doesn't significantly jeopardize India’s path to recovery. But a financial fallout from the COVID-19 pandemic is unavoidable at this point, due both to global market shocks as well as the country's larger fiscal stimulus package. A strong monetary stimulus package from India's central bank may also be needed if the outbreak worsens in India. Already, New Delhi is pressuring the bank to adopt a quantitative easing-like program of buying government bonds.

Postponing Modi's Privatization Push

The outbreak of COVID-19 will, in turn, risk delaying other economic plans that Modi had been pushing for, including selling of significant stakes in several large public sector undertakings and financial institutions. For the upcoming fiscal year, the central government had sought to raise roughly $28 billion in its divestment plan – equivalent to roughly 0.9 percent of India’s GDP and 7 percent of the government’s projected revenue — via key sales of state-owned firms. This included selling additional stakes in Air India. But with the global airline industry now in disarray due to coronavirus-related drops in demand and travel restrictions, New Delhi will likely need to bail out the airline (which had already been struggling financially before the global outbreak) to further to keep it afloat and delay its privatization. 

The Indian government had also planned to raise $7.4 billion from privatizing its second-largest oil refiner, Bharat Petroleum Corporation. But these plans will likely also be postponed, as the collapse in oil prices due to pandemic-induced drops in demand, as well as Saudi Arabia's new price war with Russia, continues to drain potential investment interest in energy companies. Moreover, India had been hoping to raise another $12 billion by launching an Initial Public Offering (IPO) for a small slice of the state-owned Life Insurance Corporation of India. Though this, too, will likely be delayed from a regulatory perspective as government activity stalls amid the COVID-19 crisis.  

New Delhi's newly proposed labor reforms are also now at risk of being delayed, which include new codes on wages, industrial relations, social security and safety conditions. These changes are crucial to improving India's business climate and attracting foreign investment, as the country's current labor market flexibility remains one of the most significant challenges for companies operating in the country. But with the COVID-19 crisis, any debate on the new proposals will almost certainly be delayed, impeding India’s economic recovery from both the immediate shocks of the health crisis and preceding slowdown.