Explained: The debt factor that weakened India’s relief package

Finance Minister Nirmala Sitharaman recently defended the government’s stimulus package after economists criticised it over lack of measures to provide an immediate boost to the economy.

The relief package announced, though soft on direct stimulus, offers enough liquidity by creating emergency credit lines that companies can avail from banks.

However, economists at Goldman Sachs said India will recover slowly as most of the measures under the ‘Atma Nirbhar Bharat’ scheme are medium-term in nature.

While stronger relief support was widely expected by the industry including direct fiscal support, Sitharaman said reckless spending in the relief package would have led to a downgrade, triggered by macroeconomic instability.

Her fears are true. India is just on the edge of a ratings downgrade to junk and could be the reason why more direct cash handouts and fiscal support was avoided.

According to ratings agency Fitch, India is facing public debt levels as high as 77 per cent. The ratings agency also said that India’s fiscal deficit is in double digits this year, putting it critically close to a ratings downgrade.

At the same time, the government faces another major concern on revenue generation when demand has dried up. It may need to borrow more in future and a ratings downgrade would not help the cause, according to a Bloomberg report.

Despite the cautious relief package, economists still say that the threat of a ratings downgrade looms large.

The fact that India was already facing a credit crunch and economic slowdown even before the coronavirus pandemic has hit sectors hard, with reports of large-scale layoffs at some companies.

With revenues dwindling fast and borrowing expected to rise, India’s fiscal deficit could rise significantly, touching double digits.

A ratings downgrade could hurt the government’s future plans besides leaving it with a fresh set of macroeconomic challenges.

Experts believe that these are some of the reasons that weakened the government’s relief package and that a slow recovery is on cards.

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