Constraints preventing India from a better stimulus package


India has announced a five tranche fiscal package focusing on MSMEs, NBFCs, power sector, and farmers & migrants titled ‘Atmanirbhar Bharat’. However, India’s fiscal package of Rs. 12 Lakh Crore amounted to just 6 % of its GDP as against 10-42% by others. Even out of this hardly Rs. 4 Lakh Crore is direct fiscal support while the rest are by way of guarantees (which means support will be given only in the event of a risk event actually happening) or are long-term in nature.

So, what constraints India from announcing a bigger package?

Rating downgrade fears: Rating agency Moody’s recently downgrade India citing weak fiscal outlook and growth concerns. If India announces higher stimulus, it will have to borrow more and incur higher debt, leading to weaker finances. This increases the chances of a further rating downgrade which we cannot afford as it means reducing our status to the ‘junk’ category from investment grade. This will have severe repercussions on foreign investment inflows, exchange rate and interest rates.

Higher debt to GDP ratio: India’s debt to GDP ratio at 72% is the highest among similarly rated peers. Apart from fiscal deficit numbers, rating agencies see a debt to GDP ratio for assessing the fiscal health of a country. Of course, countries like the US and Japan have a much higher ratio of 120% and 200%. However, there are key differences. For instance, the US has the twin advantages of low-interest rates (which reduces payouts) and the ability to print unlimited dollars (since it is an international currency) which will fund its debt easily. Japan has the benefit of negative interest rates which reduces the cost of debt significantly. However, India has no such advantages and has one of the highest interest payments. Moreover, it is also exceeding the fiscal deficit target set initially during the financial year. This means a higher cost of debt.

Risk of FII outflows: If debt levels are seen as excessive, foreign investors might lose confidence in India’s financial soundness and may pull out funds. This leads to stock market volatility and erosion of the net worth of companies. Further, sudden FII outflows can lead to depreciation of Rupee which makes imports costlier resulting in inflation.

Spike in bond yields: When the Government incurs a higher debt, its borrowing requirements will increase and will have to raise resources through more bond issues. This will lead to more supply of bonds and bond prices will go down. As the price of a bond and yields are inversely related, yields will rise. This is bad for banks and FIs as they will have to increase mark to market provision on bonds (as the price of a bond falls if it is worth less than the original price and the difference has to be provided for). Also, if yield spikes government’s interest costs will shoot up. As yields on Government securities go up, corporate bond yields and State Government bond yields (which are fixed at a spread over G-Secs) will also increase.

An obstacle to list in global bond indices: A bond index is an index like, say, Sensex or Nifty, but with the difference that it consists of sovereign bond issuances. One of the criteria to list in a global bond index is that the debt instrument should be investment grade. However, if India goes for a huge fiscal package, a further rating downgrade will take the debt rating to the junk category which will disqualify us. Listing in a global bond index is a great way to enhance our credibility in global markets.

Debt to GDP ratio—India vs peers

Should India be conservative?

Not doing a higher quantum of stimulus fearing higher debt could be short-sighted. This is because if we can ensure better GDP growth (by spending more on infrastructure, roads etc) in future by incurring a higher debt today, it will automatically ensure better fiscal health. This is due to the fact that when growth picks up, corporate profitability will increase and tax revenues to the government also go up.

The need of the hour is not to fear debt but to ensure that cost of debt (interest payments) is under control. If the denominator (GDP) grows faster than interest payments (debt), a higher debt to GDP ratio needn’t be a concern. How to reduce interest payments then? Some possible ways are:

i) To do bond switches (exchanging shorter tenor bonds for longer tenor).
ii) To issue overseas sovereign bonds as we get cheap funds from abroad as interest rates are lower.
iii) Reduction in the key policy rate (repo rate) by the RBI.

While the previous blog talked about sectors that would benefit from an unprecedented stimulus, we will now outline those sectors that will be at a disadvantage from a sub-optimal stimulus in India

How sub-par stimulus impacts BFSI segment?

Banking and financial services will be one of the sectors that will be adversely impacted by COVID-19. The possible impact on jobs and the profile of banks likely to be impacted would be as below:

1) Nature of jobs that would be adversely affected in BFSI segment

Back–office processors of applications: With the advent of artificial intelligence and machine learning tools, a variety of back-office jobs which included simple paper processing might vanish. An IHS survey predicts that 1.3 million banking jobs will either vanish or will require re-skilling of employees in the U.S alone by 2030.

Customer service representatives: Jobs of clerical staff who man the front offices etc., will see a huge churn. They will have to either be re-trained in the new environment or face the prospects of massive job losses.

Marketers and salespersons: With AI and robotics, marketing and sales jobs are likely to come under the hammer. People interface will be the bare minimum in these sectors, going forward.

Other personnel like security guards at ATMs: Robots will entirely take over these functions

Loan processing and appraisals: These jobs too will require little human interface in the future.

2) Nature of jobs that would continue to be in demand

Data scientists: Those able to make meaningful conclusions about customer behavior and product preferences from large sets of data. This category would witness huge demand as supply is also less.

CXO types: There is still a dearth of CEO and CXO talent and they will continue to come at a high premium.

Consulting roles with specific skills: There will be ever greater demand for consultants against permanent employees especially in specific skills like management advisory, risk management, project appraisals, etc. This is also a win-win for both the bank and those on-boarded.

AI and Machine Learning scientists: In an era of automation, hastened by COVID, those skilled in artificial intelligence and robotics will witness huge demand.

Banks which will keep up with new trend

Global Banks: Bank of America, Citigroup, Goldman Sachs, JP Morgan, HSBC, etc.

Domestic Banks: HDFC Bank, ICICI, Kotak Mahindra, State Bank of India, Bank of Baroda.

Banks which would be laggards

In the private sector, Yes Bank, Induslnd Bank, Catholic Syrian, South Indian Bank, Lakshmi Vilas Bank.

Generally, Public Sector banks will continue to be laggards, and coupled with rising NPAs, the future will be more challenging for them. Leading private and foreign banks are likely to attract higher market share at the cost of government banks.


1) Discuss the impact if India’s rating is downgraded to junk status.

2) Should higher debt stop us from doing a higher stimulus package?

3) What are the various measures to be adopted to reduce cost of debt?

4) Despite much higher debt why is US and Japan undertaking more stimulus?

5) How does a debt induced bond yield spike impact Government and corporates?


  1. IMF website
  3. Credit Sussie
Dr. Madhavankutty G
Dr. Madhavankutty G

Prior to joining ET Prime, was Senior Economist with Bank of India. Prior to that was an Economist in Andhra Bank (now Union Bank of India) and also served in ICFAI University as a research fellow.
Also a Member of the IBA Monetary Policy Group, and was a visiting faculty in Economics area at NMIMS University, Navi Mumbai and K.J.Somaiya Institute, Mumbai.
Holds a Masters in Business Economics and is a Certified Associate of Indian Institute of bankers (CAIIB)


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