• The stimulus package is equivalent to 10% of India’s gross domestic product.
  • The Bombay Stock Exchange surged 2.03% on Wednesday.
  • The size of the package is almost equal to Pakistan’s entire GDP

Prime Minister Narendra Modi announced that the Indian government will spend up to 20 trillion rupees ($265 billion) to help the economy deal with negative effects of the coronavirus pandemic.

The stimulus package is equivalent to 10% of India’s gross domestic product.

“This economic package will be a crucial link in the creation of a self-reliant India,” Modi said in a televised address on Tuesday evening. “It will focus on areas like land, labor, liquidity and law.”

Finance Minister Nirmala Sitharaman is expected to release further details of the package in the next few days.

The government, facing an economic slowdown even before the pandemic, has already proposed tax breaks for new factories and offered incentives to attract investments by foreign companies. The vast country has been in lockdown since late March to halt the spread of the coronavirus.

Some 122 million people in India lost their jobs in April alone as consumer demand cratered due largely to the lockdown.

Akhil Bery, a Washington-based analyst at Eurasia Group, a political risk consultancy, cautioned that the stimulus package is not all new spending.

“A significant portion is expected to be spending that is already budgeted and but merely moved up,” he said.

Bery expects the majority of the new package to help support workers in small and medium-sized enterprises through such items as unemployment insurance for laid off workers and incentives for companies to keep employees on the job.

“The magnitude of the package is bigger than expected,” said Abhimanyu Sofat, head of research at IIFL Securities Ltd, a financial services company based in Mumbai. “The funding of this huge amount is now the key focus and bonds may see sharp reaction.”

The Bombay Stock Exchange surged 2.03% on Wednesday.

It remains unclear when Indian businesses can resume normal operations. On May 17, the government is expected to announce a new phase in the nationwide lockdown – likely an extension or a modification.

“The uncertainty we still have [is] in terms of how the lockdown will look from May 18,” said Indranil Pan, chief economist at IDFC First Bank of Mumbai. “So 20 trillion rupees is on the table, but if the lockdown continues for some more time, we have to see whether [the money will be released immediately or in phases].”

Nonetheless, most analysts reacted favorably to the economic injection.

“The size of the package likely exceeds market expectations and the details will eagerly be awaited,” said Samiran Chakraborty and Baqar Zaidi, India economists at Citigroup. “This is likely to necessitate both additional market borrowing as well as an immediate announcement of [the Reserve Bank of India] support through large [open market operations] and may be even direct monetization if the combined power of fiscal and monetary stimulus has to be unleashed.”

The Citigroup economists added: “By explicitly referring to reforms in land, labor, agriculture, legal and administrative systems and infrastructure the [Prime Minister] has embarked on an ambitious reform agenda to make India more productive. Bolder structural reforms in the financial sector is also [a] need of the hour. While all these measures to boost domestic capacity is welcome, there could be a more explicit protectionist bent on the trade front in the near term as India shapes up to be more self-reliant.”

Gaurav Saroliya, director of macro strategy at Oxford Economics, commented: “Alongside monetary easing by the [Reserve Bank of India], we think this move, the details of which are still awaited, will boost market confidence that India will be able to limit the economic costs of the lockdown, which our macro team earlier estimated at around 6% of annual GDP.”

Saroliya added: “Indian equities and [the Indian rupee currency] have underperformed during the sell-off in March as they tend to be a reflection of India’s domestic growth expectations. The fiscal boost has come at an opportune time for India as valuations are cheap.”

Kaushik Das, India chief economist at Deutsche Bank, noted: “The 10% of GDP economic package is inclusive of the various liquidity measures announced by [Reserve Bank of India] earlier and the previous fiscal package announced on [Mar. 26]; so we need to see what the incremental package size is excluding the support from earlier measures.”

Economist Madhavi Arora at Edelweiss FX and Rates, said: "India's response has so far been tepid compared to other key nations and thus the catch-up is welcome… It needs to be seen how much will be in the form of direct budgetary support to gauge the immediate fiscal hit and the consequent funding sources," he added.

Indian media has remarked on the magnitude of the proposed $265 billion stimulus package – noting, among other things, that it is almost equal to Pakistan’s entire GDP (and larger than the GDP of 149 countries); equivalent to 17% of the total market cap of all companies in the Mumbai Stock Exchange; and five times the wealth of Mukesh Ambani, India’s wealthiest man.