Covid lessons for economy (India needs social infrastructure urgently)

Excellent study material for all civil services aspirants - begin learning - Kar ke dikhayenge!

 Covid lessons for economy (India needs social infrastructure urgently)

---

Read more on - Polity | Economy | Schemes | S&T | Environment

---

• Right fiscal response to COVID-19: This is the worldwide debate today, after monetary policy response has been provided aggressively nearly everywhere. People are not sure of the benefit of monetary response, yet, as risk-averse banks may not let liquidity flow down easily (to consumers and companies).
• Space versus Efficacy: Monetary policy has space, but may lack efficacy. Fiscal policy may have efficacy, but does it have the space?  [MEANING OF THIS]
• Fiscal space: This is normally all about fiscal deficit (how much, how much more, where to get more money to fund, etc.). Now, the second aspect is Debt / GDP ratio, and its evolution in 2020-30 period.

1. Future growth is always impacted by how Debt/GDP behaves
2. Three variables affect Debt/GDP - (i) Primary deficit (fiscal deficit net of interest payments), (ii) difference between nominal GDP growth and govt's cost of borrowing (higher this difference, greater the depreciation of existing debt stock)
3. High growth allows nations to grow out of their debt, while high primary deficits worsen the debt burden.

• Indian numbers today: India's Debt/GDP ratio today is 70%, primary deficit (centre + states) is 2.5% of GDP, sovereign borrowing cost of 7.5% (on stock of debt), and nominal GDP growth of 7.5% (pre-COVID).

1. So the good gap between growth and borrowing costs has closed.
2. An assessment of next decade is possible.

• Predictions: With nominal GDP growth of 4%, and fiscal deficit of 3% of GDP, the Debt/GDP will grow to 80% by 2021. That is how the whole world will experience it. But what happens next is important.
• Two FD expansion scenarios:

1. By 6 per cent - If combined FD widens (expands) by 6% of GDP, primary stays at 2%, and nominal GDP growth becomes 10% (real growth 7%), then Debt/GDP will reduce. Lesson? Bigger fiscal support is possible today, if medium-term growth lifts up sharply.
2. By 3 per cent - If FD widens by 3%, but medium-term GDP is 8% (real GDP 5%), then Debt/GDP grows to 90%.
3. Lesson - Any fiscal support depends on GDP growth in medium-term. Small changes over 10 years impact fiscal sustainability deeply.  [We need higher GDP growth]

• How to grow GDP: Hence, Government must focus on keeping GDP ticking.

1. All viable enterprises must be kept alive, and their illiquidity should not lead to death. If they die, unemployment will rise and production capacity will collapse. (hence the MSME credit guarantee scheme is excellent)
2. Support the banking sector to lend more, and aid recovery. So bond market interventions (special liquidity etc.) are good.
3. But finally, capital and reform must arrive. Recapitalise PSBs in advance, converting good NBFCs into banks are good steps. Without good funding from financial sector, higher GDP growth is impossible.
4. Real reforms - Unshackling agriculture in India is a good start. Getting India integrated into Asian supply chains is needed. Building SEZs (properly, this time!) can build productive ecosystems. Successful SEZs (one or two) can attract firms to India.

• Health and education: Now, more than ever, India realises that without a strong health and education sector, it cannot prosper. Funding all this needs monetising of PSU assets.
• Summary: Higher GDP growth is the solution to many problems - incomes, jobs, debt sustainability. Politics now has the reason to reform, which it must not miss.
• India's fiscal response to COVID depends on its projected GDP growth rate for next decade, as the debt to GDP ratio will be decided there.

Read more on - Polity | Economy | Schemes | S&T | Environment

Join UPSC Self Prep course | Online Course (PT Gurukul)  | Covid Special Course | Join PT courses

* Content sourced from free internet sources (publications, PIB site, international sites, etc.). Take your own subscriptions. Copyrights acknowledged.