Can India Learn From Brazil’s Pandemic Response? Jahangir Aziz Explains

A man takes an Indian ten rupee banknote and one rupee coins out of a wallet in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

In a world where most countries have given in to doubling or tripling their budget deficits to combat the Covid-19 crisis, Jahangir Aziz says the Indian government's response has been “miserly”. Even among emerging markets, India has seen one of the smallest fiscal support packages, even though the contraction in the economy in the April-June quarter has been the steepest across major nations.

The head of emerging market economics at JPMorgan cites the approach followed by Brazil, a fellow member of the once-popular BRICS grouping. Brazil decided to let go of the spending cap imposed in 2017, that was central in bringing down inflation and interest rates. “They have moved the fiscal deficit from 6% of GDP in 2019 to an estimated 17%,” Aziz said.

India, on the other hand, chose not to offer large amounts of income support due the lack of fiscal space. “We have obsessed about the short-term impact of fiscal spending or income support on private demand in 2020,” Aziz said, admitting that there would be little benefit of those in the presence of continued infections and lockdowns. But India has failed to understand the broader objective behind such emergency support.

“What we are forgetting is that income support plays a critical role in how much the balance sheets of households and SMEs are damaged,” he said. "If we go into 2021 with severely damaged balance sheets, and banks look at those damaged balance sheets and don't start lending to a very large swathe of the population, I think we will find it very difficult to see a recovery.”

We might end up damaging medium-term growth over the next two-three years just because we wanted to show a semblance of fiscal discipline in 2020.

Jahangir Aziz, Head-Emerging Market Economics, JPMorgan

Aziz questions why India is acting like “the steward of fiscal discipline”, when every other country is increasing budgetary spending.

“This is not 2013. There are no fragile five economies with loose monetary and fiscal policies, while the rest of the world is following fiscal and monetary discipline,” Aziz said. “Everyone is blowing up their budget.”

If the government increases spending this year, it would be part of the pack, Aziz argued, but if India is forced to expand its budget in 2021 because of the damaged balance sheets, it would stand out as the one country that is not consolidating.

Should the government step up spending support, where should it be directed? Unlike a number of other economists, who are suggesting a public works programme, Aziz still strongly recommends income support. “What infrastructure spending can you do when the country's infection rate is going up every day? Who is going to lay that infrastructure?”