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India’s central bank Governor Shaktikanta Das underlined the need for fiscal measures to support the economy, saying a slippage in budget gap target was unavoidable amid the coronavirus crisis.
The government is working on an economic package to tackle the impact of the virus, Das told Cogencis newswire in an interview whose transcript was released by the Reserve Bank of India Monday. Meeting the fiscal gap goal for the financial year started April 1 — 3.5% of gross domestic product — was very challenging and he expects the government to make a judicious call on managing the deficit.
“Fiscal measures are important,” said Das, who’s led the RBI in delivering rate cuts and injecting more than $50 billion in liquidity since last month. “Whether it relates to fiscal deficit or liquidity or any other extraordinary measure, it has to be applied in time, and the exit also has to be made in time,” he said.
Economic activity in India came to a virtual standstill after Prime Minister Narendra Modi ordered a nationwide lockdown through May 3 to stem the spread of the coronavirus. That’s seen pushing Asia’s third-largest economy toward its first full-year contraction since 1980, while the global economy appears on course for its worst downturn since the Great Depression.
A prolonged slowdown in the economy is likely to hurt tax collections and could limit Finance Minister Nirmala Sitharaman’s ability to expand support without resorting to additional borrowings. She has already outlined a virus relief package of Rs 1.7 lakh crore ($22.5 billion) to help the poor through cash handouts and free fuel and food rations.
With more measures expected to rescue the industry, Fitch Solutions sees the government’s fiscal deficit being pushed up to as high as 6.2% of GDP in the current year.
Economists including former central bank officials have said the RBI would have to directly buy sovereign bonds if the government has to boost spending to combat the coronavirus pandemic. While others have opposed the idea saying it would lead to a ratings downgrade and higher borrowing costs, Das appeared to be treading a cautious line.
“There is an animated public discourse around this subject,” he was cited as saying. “On the current situation, we haven’t taken a view on it. We will deal with it keeping in view the operational realities, the need to preserve the strength of the RBI’s balance sheet, and most importantly, the goal of macroeconomic stability, our primary mandate. In the process, we also evaluate various alternative sources of funding too.”
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