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Wednesday, May 12, 2021

Explained Ideas: What India can learn from Brazil to avoid Covid-19 turning into a financial crisis

At 67.2 per cent (annualised quarterly rate), the GDP growth collapse in India has been the second-largest in the world, writes Jahangir Aziz.

By: Explained Desk | New Delhi |
Updated: September 18, 2020 12:27:59 pm
india economy, india economic growth, india gdp, india economy contraction, coronavirus news, indian expressDaily wage laborers wait to get hired for the day in Mumbai, Sept. 16, 2020. (AP Photo: Rafiq Maqbool)

Jahangir Aziz, Chief Emerging Markets Economist at J P Morgan, writes that if the Indian government does not provide ample income support for households and firms then the pandemic can easily turn into a financial crisis and hurt medium-term growth prospects.

In his opinion piece in The Indian Express, Aziz gives the example of how the Brazilian government handled the economic fallout of the Covid19 pandemic.

“The (Brazilian) government allowed the spending cap to be breached with large pandemic-related additional expenditure including a generous income support, especially to the Bolsa-Familia households (roughly equivalent to BPL households in India), which alone can amount to over 4.5 per cent of GDP,” writes Aziz.

Taken together, these measures will raise overall spending to above 28 per cent of GDP and together with the revenue shortfall, will increase Brazil’s fiscal deficit from 6 per cent of GDP in 2019 to an astounding 17 per cent of GDP this year.

“And the additional spending has helped,” writes Aziz.

Although Brazil’s COVID-19 infection rate was about the same as in India in the second quarter (in the last two months the rate has stabilised while that in India has continued to climb), GDP growth collapsed by 33.5 per cent, half of that in India.

Indeed, at 67.2 per cent (annualised quarterly rate), the growth collapse in India was the second largest in the world next only to that in Peru.

Also read | Explained Ideas: What can the government do to revive India’s telecom industry?

“If one looks under the hood, public spending helped to offset some of the collapse in private demand in Brazil but in India, it added to the decline,” he explains. On the back of the continued income support, analysts have upgraded growth in Brazil while further downgrading it in India.

Aziz writes that the income support by the Brazilian government has not just supported the total demand this year but also, and more importantly, protected, to varying degrees, the balance sheets of households and small businesses from the extensive damage during the pandemic.

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