India urgently needs to increase fiscal support for COVID-19 relief and rebuilding. Among comparable developing countries with similar Gross Domestic Product (GDP) per capita, India has spent the least as a share of its GDP.
While the Central government has announced measures amounting to 0.8% of GDP, the International Monetary Fund (IMF) estimates that State-level relief adds around 0.2%, making the total 1% of GDP. Indonesia, Bangladesh, Pakistan, and Vietnam have spent much more.
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Things are moving fast. Only a week ago, India was in the same range as Bangladesh and Vietnam. While there are important differences across countries, including historical and political-economic factors, mode of fiscal policy, as well as the extent of COVID-19 spread, a comparison of fiscal responses helps illustrate lessons that can be shared across developing countries. Here, we compare support extended to informal workers, small enterprises and specifically affected sectors. We also look at modes of financing at the national and sub-national levels.
All the countries have large informal sectors that bear the brunt of a shock like the COVID-19 lockdown. Vietnam is considering paying $77 (₹5,870) per month to such workers who are temporarily laid-off or forced to go on unpaid leave, and $43 (₹3,280) per month to the self-employed and those without unemployment insurance.
Brazil has announced a cash transfer for 54 million informal workers of $115 (₹8,760) each month for a three-month period. Even if India cannot match the level of payments of richer countries such as Brazil, the announced cash transfers of ₹500 (around $7) per month to 200 million women and similar transfers at the State level to vulnerable workers fall far short of what is required.
India must enhance fiscal support
Dual strategy
Many developing countries have a dual strategy of providing immediate aid to workers who have been laid off and feeding poor families, while also trying to keep firms afloat. Indonesia, Vietnam, Bangladesh and China have all announced tax relief — in the form of deferments or reductions — for small and medium-sized enterprises (SMEs) in hard-hit regions.
In an effort to preserve jobs, both China and Vietnam are allowing firms to defer contributions to social security funds to cut operating costs. India has announced a similar measure, with the government paying employer and employee provident fund contributions for three months for workers earning less than ₹15,000 per month.
Support for MSMEs
Brazil has also created a $10 billion (₹760 bn) programme to allow businesses affected by COVID-19 to reduce workers’ salaries and hours by up to 70%, with the government partially compensating workers for up to three months. One important omission from the Indian response is such direct wage support for micro, small, and medium enterprises, which account for the bulk of employment.
In addition to helping MSMEs and workers in general, a few developing countries are assisting firms and workers in sectors particularly affected by COVID-19. Bangladesh has spent $600 m (₹45.5bn), in the form of loans to export-oriented firms, especially in the garment industry, in order to pay their workers’ salaries for three months. Around 4 million affected workers will benefit from this scheme, with payments sent via financial services on mobile phones — a technique that could be replicated in India.
Both Indonesia and Egypt have also targeted the travel and tourism sector for financial assistance, with Indonesia offering subsidies for travel costs and Egypt committing half of its $6.4 bn (₹486 bn) stimulus to supporting its tourism sector, which accounts for 10% of total employment. While specific sectors will differ for India, such an approach should be considered.
An important question for all developing countries is how these measures will be financed, especially since credit ratings have been slashed and capital outflows have further squeezed available funds.
Indonesia, Bangladesh and Brazil, realising the inevitability of high budget deficits, are preparing and announcing revised budgets. Indonesia has temporarily suspended a rule preventing the government from running a deficit of more than 3% of GDP.
India will likely revisit the Fiscal Responsibility and Budget Management (FRBM) guidelines this year. The Indian government has asked the Reserve Bank of India to indirectly purchase government bonds on the open market but has left open the prospect of the RBI directly monetising the deficit. This practice (that ended in 1997) might have, under normal circumstances, led to inflationary concerns, but these are extraordinary circumstances.
The move has parallels in Indonesia, where the government announced a new “pandemic bond” to raise funds for its deficit and the central bank, Bank Indonesia, has been allowed to purchase government bonds directly, after the revocation of a 1999 law. Indonesia has successfully raised $4.3 bn (₹326 bn) in its bond drive, including by issuing a 50-year bond — its largest ever.
While India’s debt-to-GDP ratio is higher than those of developing South-East Asian countries, what matters is the ability to finance the debt, which India possesses. Moreover, the failure to act in adequate measure now may lead to much lower growth in the future, increasing the debt-to-GDP ratio.
Finally, States and provinces will remain at the forefront of all efforts in most countries and need to augment their fiscal and administrative capacities to respond. In India, the RBI has raised the short-term borrowing limit of States by 30%. This could go up further.
Similarly, the Brazilian government has transferred funds to States and municipalities to fight the medical battle against COVID-19, while also offering them debt relief and enhanced credit lines. Chinese local governments have issued bonds to fund efforts to stimulate aggregate demand through infrastructure investment.
The trend across major developing countries seems clear: give State and local governments as much support and discretion as possible, with the coordination of the Central government and the central bank in the background. It is time to enhance our efforts in India and plan for the medium- to long-term recovery.
(Amit Basole is faculty member, School of Arts and Sciences, Azim Premji University, Bengaluru, and Jonathan Coutinho is research assistant, School of Arts and Science, Azim Premji University, Bengaluru.)
