Even before the Centre made its decision to extend its 40-day lockdown by a further two weeks, economists had been stressing the need for an urgent fiscal stimulus package. The voices calling for stimulus ranged from former Chief Economic Adviser Subramanian, who argued for a pre-emptive stimulus to lift the economy from a likely contraction, to former RBI Deputy Governor Rakesh Mohan, who underlined that India today has the ability to sustain high fiscal deficits for short periods, and must use this to provide relief to workers and small businessmen hit by this enforced standstill. Both have suggested a stimulus amounting to about 5 per cent of the GDP. The Centre though, seems to be far more inclined to listen to warnings from global rating agencies, who have been making their usual threatening noises about the dangers of India overshooting its debt and deficit targets. Fitch Ratings recently warned that Covid will likely batter India’s GDP growth to 0.8 per cent in FY21, but seemed to caution against doing anything about it, citing limited fiscal space.

There are several good reasons why the Centre must ignore such warnings and focus on resuscitating the economy quickly instead. One, given the stringency of the lockdown and the high proportion of small businesses and informal workers, the economic impact of Covid on India is likely to be far worse than in countries with a social security net. But its fiscal response so far has been underwhelming, with incremental measures totalling to sub-1 per cent of the GDP. If the economy is left to its own devices, a contraction is highly likely, in which case fiscal deficit and public debt ratios will automatically worsen on a shrinking denominator. Two, deficits and government borrowings are as much a function of revenues as of expenditure. Without urgent intervention to ensure growth, a precipitous fall in tax collections can very easily offset any savings from frugal spending. Some States reporting an 80-90 per cent drop in their April GST collections is a harbinger of things to come. Three, sovereign ratings are as much a function of a country’s growth and financial stability as of its public debt and deficit parameters. Without timely fiscal intervention to support the economy and the financial system, both growth and stability would be at risk, rendering deficit and debt irrelevant to the ratings. Global rating agencies are well-known for constantly shifting their goalposts on what variables go into their rating opinions. The 2016 Economic Survey had critiqued Standard and Poor’s for upping China’s ratings amid its untrammelled credit expansion, while citing low per capita growth to retain India’s BBB-minus rating despite its lower public debt.

Given that the Indian government doesn’t borrow overseas, sovereign ratings matter mainly to help attract capital flows and investments into the private sector. These investors are far more likely to bet on India for its vibrant consumer markets and growth potential than for its sovereign debt and deficit metrics.

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