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This article was first published 3 years ago  » Business » How India's economy can deal with the COVID-19 crisis

How India's economy can deal with the COVID-19 crisis

By Anup Roy and Indivjal Dhasmana
April 21, 2020 19:42 IST
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'India's sizeable foreign exchange reserves should serve as a buffer.'

Illustration: Dominic Xavier/

'It is too early to assess the potential longer-term impact, but the debt repayment capacity of borrowers may weaken and risks to banks's asset quality could arise if the economic fallout of the pandemic gets protracted,' Ranil Salgado, India Mission Chief at the International Monetary Fund, tells Anup Roy and Indivjal Dhasmana.


With COVID-19 causing a global recession, will India still be the bright spot in the world that IMF generally describes the country as?

The economic impact of COVID-19 is expected to be substantial, but recovery should take hold once the virus has been contained.

A gradual recovery is expected in FY2021/22 (7.4 per cent growth), supported by monetary easing and some targeted fiscal measures, as well as favourable terms of trade from lower oil prices.

Any advice for India on the extent to which it should widen fiscal deficit? Should it go for deficit monetisation with the RBI?

The immediate priority is to take all steps needed to address the health needs of the country, including by boosting health care spending.

It could also include extending the lockdown as needed.

In addition, we believe further measures could be taken on fiscal, monetary, and financial sector policies in the near term.

In the near term on fiscal policy, additional support is needed, including on health care, for small and medium-sized firms, and vulnerable households, beyond the fiscal stimulus package already announced.

This could require rationalisation of some non-priority expenditures.

After the COVID-19 shock recedes, though, substantial new measures will be needed over the medium term to bring the deficit and debt back towards the central government's medium-term targets (3 per cent and 40 per cent as a share of GDP).

Committing now to credible and clearly defined medium-term measures, along with increasing fiscal transparency could help the government finance some of its short-term needs by increasing investor confidence and lowering borrowing costs.

Monetary policy should maintain a strong easing bias to mitigate any sharp COVID-19-related slowdown and support the recovery.

What would be the likely impact of the pandemic on the banking system?

The lockdown is critical in containing the spread of the virus, but it is also having a significant impact on households (especially low-income) and corporate through the loss of income and slowdown in economic activity.

The loan moratorium will provide relief to borrowers whose cash-flow has come under stress due to the pandemic, but could also constrain liquidity in the financial system.

It is too early to assess the potential longer-term impact, but the debt repayment capacity of borrowers may weaken and risks to banks's asset quality could arise if the economic fallout of the pandemic gets protracted.

In this regard, we take note of the progress prior to the outbreak in addressing banks' balance sheet weaknesses and improving their capital positions.

Is the RBI's foreign exchange reserves enough to provide an adequate backstop if there is a financial slowdown?

India's foreign exchange reserve levels are assessed to be adequate for precautionary purposes, according to various criteria.

The official FX reserves are at around $475 billion (16 per cent of GDP). Short-term debt, plus the projected current account deficit for 2020/21, is about 25 per cent of the official FX reserves.

India's exchange rate flexibility and sizeable FX reserves should serve as buffers.

India's real effective exchange rate has remained relatively stable vis-a-vis other emerging markets currencies.

Does that indicate that volatility in USD-INR exchange rate is in the offing?

Intensification of the external risks, including a sharper-than-expected and a more prolonged global slowdown, and heightened risk aversion could lead to further capital outflows and FX market pressures in emerging markets, including India.

However, India has strong foreign exchange reserves buffers, and exchange rate flexibility should continue to play the role of a shock absorber while avoiding excessive volatilities.

Do you expect the outbreak to move some productions away from China? How should India approach this to further its 'Make in India"' initiative?

The outbreak is now global.

To benefit from the secular trends in global supply chains (GVCs), looking beyond the outbreak, creating an ecosystem for GVCs participation along with deeper backward linkages is critical.

Reducing tariffs and non-tariff barriers, while minimising trade policy uncertainty, would help.

Furthermore, energy, logistics, port facilities, and customs will need to be aligned to attract foreign companies to locate in India.

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Anup Roy and Indivjal Dhasmana
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