The increase in India’s Covid-19 cases remains high though new cases have decreased steadily and recovery rate increased. With the ongoing festive season in the country and the lifting of the lockdown near complete, the situation can get worse if due precautions are not observed in the country. The economic revival will remain a major challenge for India this year as mentioned by international financial institutions. The forecasts have deteriorated for the current financial year and though they look a lot better for the next financial year, all will depend on the measures taken to tackle the coronavirus spread and economic stimulus. The new consolidated FDI Policy was announced after a gap of 3 years.
Consolidated FDI Policy – The Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce and Industry, Government of India, recently released the Consolidated Foreign Direct Investment Policy. This document is a consolidation which subsumes and supersedes all Press Notes/Press Releases/Clarifications/Circulars issued by the DPIIT, which were in force as on October 15, 2020 and reflects the FDI Policy of India as on October 15, 2020. This Circular accordingly will take effect from October 15, 2020 and will remain in force until superseded in totality or in part thereof. The previous such consolidated FDI policy was released in 2017 (as reported by Asia Law Portal here). As per the 2020 document, applications involving investments from an entity of a country, which shares a land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, will need approval from the government. It has replaced the clause that said: “Applications involving investments from Countries of Concern which presently include Pakistan and Bangladesh, requiring security clearance” in the 2017 circular.
IMF’s World Economic Outlook – The International Monetary Fund (IMF) recently released its World Economic Outlook October 2020 report tilted ‘A Long and Difficult Ascent’. The report mentions that revisions to the forecast are particularly large for India, where GDP contracted much more severely than expected in the second quarter. As a result, the economy is projected to contract by 10.3 percent in 2020, before rebounding by 8.8 percent in 2021. The 2020 projection for India is a downgrade of -5.8 percentage points from the IMF’s June projection for the country (reported by Asia Law Portal here). India is expected to rebound in 2021 with 8.8 percent growth – an upgrade of 2.8 percentage points relative to the June update. For the world as a whole, the 2020 growth projection has been revised upwards by 0.8 percentage points relative to June– a result of a less dire second quarter and signs of a stronger recovery in the third quarter, partly offset by downgrades in certain developing countries and emerging economies (except China).
World Bank’s South Asia Report – The World Bank recently released its South Asia Economic Focus, Fall 2020 report titled ‘Beaten or Broken? Informality and COVID-19’. The report mentions that India’s GDP is forecast to plunge in FY21 by 9.6 percent (revised down since June from a 3.2 per-cent drop), reflecting the impact of the national lockdown and the income shock experienced by households and small urban service firms. Growth is forecast to return to 5.4 percent in FY22, assuming COVID-related restrictions are completely lifted by 2022, but mostly reflecting base effects. The COVID-19 shock will lead to a long-lasting in-flexion in India’s fiscal trajectory. Assuming that the combined deficit of the states is contained within 4.5-5 percent of GDP, the general government fiscal deficit is projected to rise to above 12 percent in FY21 before improving gradually. Public debt is expected to remain elevated, around 94 percent, due to the gradual pace of recovery.
Moody’s Indifference to Government Spending – The latest fiscal measures announced by the Indian government highlights the limited spending firepower of the government and will have a negligible impact on India’s falling economic growth, credit rating agency Moodys said. The rating agency was referring to the Rs 46,700 crore stimulus announced by the government recently which includes cash payments to government employees and interest-free loans to states with an aim to boost consumer spending during India’s festive season, and to increase capital expenditures. Moodys put these measures at 0.2% of its real GDP forecast for fiscal 2020, ending March 2021 and said it highlights the government’s limitations. “Notwithstanding the fiscal prudence of the measures, the small scale of the stimulus highlights limited budgetary firepower to support the economy during a very sharp contraction, a credit negative. Even when combined with the government’s fiscal stimulus earlier in 2020, the size of the measures remains modest. In total, the two rounds of stimulus bring the government’s direct spending on coronavirus-related fiscal support to around 1.2% of GDP.” Moodys said.