Fiscal Situation of India in the Time of COVID-19

Abstract

COVID-19 pandemic, a health crisis, has rattled the global economy. In this situation, the Indian government has announced a fiscal package worth INR 1.7 trillion, but there are arguments for even more spending. Using data from a cross-section of countries, we first estimate the relationship between fiscal spending and COVID-19 spread, economic stringency, and macroeconomic factors. Our estimates suggest that India can spend 2.2-4.8 percent of its Gross Domestic Product (GDP), based on the global benchmark. Accounting for tax and output shortfall due to the pandemic, we project the fiscal deficit of the central government can be as high as 8.4 percent, in the most pessimistic case, while 3.7 percent in a relatively optimistic case. We finally argue that subsidy rationalization is the way forward to fund the much-needed health expenditures and transfers while maintaining the fiscal discipline

Keywords: Fiscal deficit, Debt

JEL Classification: E62, O23