The Indian government announced a fresh stimulus of $16.1 billion on Thursday to be spent largely on creating jobs and boosting the nascent recovery visible in various sectors even as it tries to keep a lid on the ballooning fiscal deficit.
The economy is seeing a strong rebound taking root and it is not just pent-up demand, Finance Minister Nirmala Sitharaman said while announcing a third round of fiscal stimulus to help stressed sectors withstand the Covid-19 pandemic.
Latest measures included additional funding for real estate developers and contractors, fertiliser subsidies, a new employment scheme and additional spending on the rural jobs scheme among other initiatives.
The government will spend 1.2 trillion rupees ($16.1 billion) on the latest stimulus program in addition to the 1.45 trillion rupees announced on Wednesday, taking the total stimulus announced so far including that by the central bank to 15% of gross domestic product, Sitharaman said.
While there was no clarity offered on how much impact the new spending will have on the fiscal deficit, Barclays said it estimates the deficit would rise to 7% of GDP.
Reuters reported on Wednesday that India was planning to announce a fresh round of stimulus amounting to about $20 billion this week to help pull the economy out of its historic contraction.
The government's total cash expenditure on all three coronavirus related packages is likely to be under $60 billion, according to officials, due to concerns that spending over that could trigger a sovereign rating downgrade.
The officials also said that in 2020/21 the government will spend more than the 30.42 trillion rupees announced in the budget to help drive economic recovery.
"We expect that the announcement will help generate jobs (and) oil the engine of the economy," said Naveen Kulkarni, chief investment officer at Axis Securities.
Sitharaman said an increase in tax collections for goods and services, higher energy consumption, a rise in the purchasing managers' index, improved bank credit and a stock market surge all suggested that stimulus measures taken so far had helped.
The Indian economy, which the International Monetary Fund singled out as a global bright spot only a few years ago, was the worst performing major economy in the April-June quarter, contracting 23.9% amid a stringent lockdown to curb Covid-19.
The economy is expected to contract close to 10% in the fiscal year to March 2021. But Sitharaman noted that the Reserve Bank of India had predicted a strong likelihood that the economy might begin to show growth in the October-December quarter.
She said the government is also launching a scheme to incentivise the creation of new jobs in a bid to fuel a rebound.
Despite Sitharaman's buoyant tone, markets initially weakened before recovering some ground following the announcement of additional job creation.
The NSE Nifty 50 index ended down 0.46%, while the S&P BSE Sensex closed 0.54% lower. The indexes had earlier dropped nearly 1%. [.BO]
"Notwithstanding the robust reform momentum and stimulus announcements so far, government spending contracted on a YoY basis in Q2 of FY21," said Aditi Nayar, Principal Economist at rating agency ICRA, the Indian arm of Moody's Investors Service.
"We hope to see this turnaround in the ongoing quarter, to help solidify the economic revival."