Awaiting India's Second Round of Stimulus
And India's new restrictions on Foreign Direct Investment from China
Hi there, I’m Aman Thakker. Welcome to Indialogue, a newsletter analyzing the biggest policy developments in India. The aim of this newsletter is to provide you with quality analysis every week on what’s going on in India.
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Tracing India’s Response to Economic Downturn from COVID-19
Last week, this newsletter discussed the ongoing debate on the merits and flaws in India’s lockdown decision as India awaited Prime Minister Modi’s decision on whether or not to extend India’s 21-day lockdown. The PM, as expected, extended the lockdown, which will now end on May 3rd. Some parts of India, however, which have not reported any cases in 28 days will be labelled “green zones” and may be allowed to ease restrictions as early as today, April 20.
Following this decision, the focus of the discussion has quickly shifted away from the lockdown itself, and to the economic downturn resulting from the lockdown and the wider spread of COVID-19. Projections for India’s growth have been revised significantly downward by analysts around world, ranging from 1.6% to 0% to even an economic contraction. All of this has led analysts to call upon the government to announce a set of bold policies to support businesses and individuals.
So far, India has only announced one package of fiscal stimulus on March 26, 2020: a package worth $22.6 billion, amounting to about 0.8% of India’s GDP. The package was aimed at providing direct cash transfers to 30 million senior citizens and 200 million poor women, as well as ensuring food security and supply of cooking gas to India’s most vulnerable.
The other policy moves so far have come from the Reserve Bank of India, which, this past week on April 17, announced measures to push banks to continue lending by providing additional liquidity to the financial system, as well as by making the option for banks to deposit their excess cash with the RBI unattractive. This came after an earlier announcement from the RBI to cut interest rates and to provide borrowers with an option to avail themselves of a three-month moratorium on loan repayments.
However, analysts have argued this is not enough. They point to countries such as the United States and Germany, who have announced packages worth between 5% and 10% of their respective of GDPs. There is, therefore, growing pressure on the government to announce something major in its second round of fiscal stimulus which is expected any day now (Frankly, I expected the announcement to have been made already). Indeed, reports late last week indicated that the Finance Minister Nirmala Sitharaman had met with the Prime Minister for nearly three hours to finalize what the details of the package.
While we still await the final package, it is increasingly becoming clear that Indian policymakers will not go for a major, “big bang” package, and rather continue taking a different approach. Here’s what Principal Economic Advisor to the Government of India, Mr. Sanjeev Sanyal, has said about the government’s strategy:
The expectations, therefore, are that the second package, when announced, will be limited in size, and potentially even in focus. Micro, small, and medium-sized enterprises (MSMEs) are likely to be the focus of the package, with the government either providing payroll support akin to the United States’ Paycheck Protection Program, or provide support for fixed business costs, such as electricity. The government is also likely to continue its focus on direct cash transfers to farmers, women, senior citizens. Finally, key industries that have faced acute challenges, such as aviation as well as hospitality and tourism, could potentially receive support.
Such an incremental, step-by-step approach has some merits and can be potentially successful. Maintaining India’s fiscal health is a key priority, and announcing huge spending now can leave little room for the government to do much later if the crisis worsens, or for post-COVID-19 rebuilding of the economy.
However, the one word I would argue that is missing from Mr. Sanyal’s adjectives to describe the government’s approach is “agile.” Clearly, the government’s delay in announcing the package is not ideal, and means that there is greater uncertainty, and that the ultimate package, whenever it is announced, might come too late for individuals and businesses on the brink of spending their last rupees.
Moreover, while Mr. Sanyal has argued that another reason for the step-by-step approach is to ensure India has sufficient “ammunition” for post-COVID reconstruction, we also need to consider the risk that the government, through this approach, ends up fighting too many crises with too little ammunition to be successful. This is clearly a delicate balance, and I hope and expect that the government has a plan to ensure that doesn’t happen. In the meantime, at least, we collectively await the government’s announcement of the second fiscal stimulus package.
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India Restricts Foreign Direct Investment From China
Over the weekend, the Department for Promotion of Industry and Internal Trade’s FDI Policy Section announced new changes to India’s rule on Foreign Direct Investment in order to prevent “opportunistic takeovers/acquisitions of Indian companies due to the current COVID-19 pandemic.” The change forces any “entity of a country, which shares 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” to obtain government permission before it can invest in Indian companies.
While the language doesn’t name China directly, it is fairly clear that this revision in policy is aimed at investments from the country. Indeed, the decision reportedly comes after the People's Bank of China, China’s central bank, increased its ownership stake in India's largest non-banking mortgage provider, HDFC Bank, Ltd., which was concerning to Indian policymakers.
China did not waste much time to express its unhappiness with India’s move, putting out a statement on the Chinese Embassy in New Delhi’s website, which noted that “The impact of the policy on Chinese investors is clear” and that “The additional barriers set by Indian side for investors from specific countries violate WTO’s principle of non-discrimination, and go against the general trend of liberalization and facilitation of trade and investment.
For those who are pushing for India to liberalize further and shed its protectionist tendencies, this step can highlight some of the ways politics can inhibit progress on this front. The Modi government itself has taken its fair share of protectionist steps - from withdrawing from the Regional Comprehensive Economic Partnership to increasing custom duties to enacting local content requirements. However, it is also flanked on either side politically by protectionist forces. In the opposition, the former President of the Indian National Congress, Rahul Gandhi, had called for a similar policy to prevent foreign takeovers, and took credit for the policy change after it was announced.
Similarly, within the BJP’s wider ideological camp, organizations such as the Swadeshi Jagran Manch (SJM), have also hailed the government’s decision and called for further action. Ashwani Mahajan, co-convener of the SJM, said in response to the government’s decision:
What we want the government to do is to be careful about domestic interests… we need some distinguishing factors between investments that come from China and those that come from elsewhere. The global supply chain management system needs a massive overhaul so that our dependance on China is significantly reduced. We should also look at anti-dumping duties and the scope we have to increase tariffs."
For anyone interested in reading more about this topic, I recommend you check out:
“Following the Money: China Inc’s Growing Stake in India-China Relations” by Ananth Krishnan, a journalist at The Hindu and Visiting Fellow at Brookings India.
“China’s Strategic Tech Depth in India” by Amit Bhandari, and Aashna Agarwal from the Gateway House - Indian Council on Global Relations.
In Other News
The U.S. State Department authorized two Foreign Military Sales to India. The first sale is for 10 AGM-84L Harpoon Block II air-launched missiles and related equipment at an estimated cost of $92 million. The second is for 16 MK 54 Lightweight Torpedoes and related equipment at an estimated cost of $63 million.
India’s Ministry of Power releases a draft Bill proposing amendments to the Electricity Act, 2003. The big reform here is on India’s distribution companies, which are under severe financial stress. The Bill aims to privatize these companies under “sub-licensing” and “franchisee” models. The bill also aims to streamline tariffs and subsidies, as well as establish an Electricity Contract Enforcement Authority. The draft bill is open to comments from the public until May 8, 2020.
The Cyber Coordination Centre, under the Union Ministry of Home Affairs (MHA), has issued an advisory outlining security concerns with the Zoom videoconferencing platform, stating that “Zoom is not a safe platform.” It goes on to say that while government officers should not use Zoom for official government purposes, “guidelines have been issued to safeguard private individuals who would still like to use the platform for private purposes.”
The United States and India deepen coordination on COVID-19 research through the Indo-U.S. Science and Technology Forum. The Forum has “invited Proposals for ‘COVID-19 Indo-U.S. Virtual Networks’ that would allow Indian and U.S. scientists and engineers currently engaged in COVID-related research to carry out joint research activities through a virtual mechanism, leveraging existing infrastructure and funding.”
India’s Department of Commerce released Foreign Trade Data for FY2019-20. While the trade deficit decreased from $176 billion to $153 billion, exports shrunk by 1.36% while imports shrunk by 6.33%.
Three to Read…
From cogent analysis to potentially big news that you should keep an eye on, here are a few commentaries and other pieces of writing that I found particularly enlightening.
Yamini Aiyar, President and Chief Executive of the Centre for Policy Research in New Delhi, argues: “We must remember that a democracy that treats its citizens with callousness and a complete lack of compassion, cannot survive, regardless of the consequences of an epidemic. The very fact that migrant workers have been denied the basic dignity of going home and two square meals a day, in a moment of crisis, is a serious blot on our democracy. Responding to an epidemic requires a compassionate State. On this metric, the Indian State has thus far failed. It needs to step up, urgently.”
Akhil Bery, South Asia Analyst at Eurasia Group (and a big supporter of this newsletter) writes about the risk of possible sectarian violence in India resulting from the communal overtones in coverage of COVID-19 in India: “A large portion of the country's confirmed Covid-19 cases (about 10%) have been linked to a gathering of more than 3,000 people in Delhi held by the Islamic missionary group Tablighi Jamaat in early March (the capital was already on high alert then but not yet on lockdown). Since then there has been an uptick in anti-Muslim rhetoric on social media, likely inflamed by the BJP's loosely affiliated team of cyber warriors. Examples of trending hashtags on Twitter include #CoronaJihad and #TablighiVirus.”
In a follow-up to their previous article (which Indialogue had referenced last week in this section), Dr. Arvind Subramanian, former Chief Economic Advisor to the Government of India, and Dr. Devesh Kapur, professor at Johns Hopkins University, note: “Existential threats test the character of nations and societies. But they are also moments of peak opportunity for countries to shape their future for decades to come. So it is with the Covid-19 crisis, engulfing countries around the world. For India, the current crisis requires collective solidarity in the form of resources to be provided by the wealthy and privileged to aid those devastated by the crisis. But this immediate solidarity should then be codified in a permanent new social contract to ensure that no Indian should ever have to face in the future the plight that hundreds of millions are facing today.”
… And Two To Listen To
Milan Vaishnav, Director and Senior Fellow at the South Asia Program at the Carnegie Endowment for International Peace, completed 50 episodes of his fantastic podcast on Indian politics, Grand Tamasha. Listen to the most recent episode with Amitabh Behar on how between COVID-19 aggravates inequality in India, and check out the full archive of the podcast on Spotify, Apple, or Stitcher.
The Bridge Project, a student-led podcast aiming to bridge the divide between academics and policymakers in India’s foreign policy space, hosted Dr. Sreeram Chaulia, Professor & Dean, Jindal School of International Affairs, O.P Jindal Global University and Kashish Parpiani, Research Fellow, Observer Research Foundation for a conversation about U.S.-India relations.
Thanks for reading this latest edition of Indialogue. Please let me know if you have any thoughts or feedback by emailing me at aman@amanthakker.com.