“This is because the interest rate on debt paid by the Indian government has been less than India’s growth rate by norm, not by exception”.
Economic Survey 2021: The Economic Survey exhorted the government to be ‘more relaxed about debt and fiscal spending’, and even argued for a rethink on the established fiscal consolidation policy, especially during growth slowdowns and crises like the current one. It devoted a chapter to show that growth leads to debt sustainability in the Indian context but not necessarily vice-versa. “This is because the interest rate on debt paid by the Indian government has been less than India’s growth rate by norm, not by exception”.
The call for more active counter-cyclical fiscal policy by leading economists in the government comes at time when the general government fiscal deficit is seen touching 12% of the GDP in FY21, double the goal set under the FRBM glide path, even without enabling much additional budgetary expenditure by the Centre and states. There is a consensus call against a tightening of the Centre’s Budget for FY22, which is due Monday, and expectations are that the Centre’s fiscal defict for FY22 will be estimated at 5-5.5% of GDP.
Explaining the rationale for high fiscal spending at this juncture, the authors of the survey led by chief economic adviser Krishnamurthy Subramanian prognosticated that India’s debt-to-GDP will be sustainable even in the worst case envisaged under their models in FY29.
“For emerging economies such as India, an increase in public expenditure in areas that boost private sector’s propensities to save and invest, may enable private investment rather than crowding it out. In other words, in an economy that has unemployed resources,an increase in government spending increases the aggregate demand in the economy, which may induce the private sector to increase their investment in new machinery to cater to the increased demand, and hence put the unused resources to productive uses,” the survey noted.
Adhering to the report of the FRBM Review Committee, headed by NK Singh, India has adopted public debt-to-GDP ratio as a medium-term anchor for fiscal policy in India. While the panel’s view is that combined debt-to-GDP ratio of the Centre and states should be brought down to 60% by 2023 (40% for the Centre and 20% for states), Icra has recently estimated that the total liabilities of the Centre are projected to worsen from 49.3% of GDP at the end of FY20 to 59% of GDP at the end of the current fiscal.
Amid rising concerns over worsening economic inequalities, the Survey found that economic growth has far greater impact on poverty alleviation than inequality, and underscored the need for continued focus on structural reforms to enhance the economy’s productive capacity. “…given India’s stage of development, India must continue to focus on economic growth to lift the poor out of poverty by expanding the overall pie. Note that this policy focus does not imply that redistributive objectives are unimportant, but that redistribution is only feasible in a developing economy if the size of the economic pie grows,” the authors of the survey observed.
Amid the prolonged agitation by a section of the farming community against the laws governing agriculture marketing, the survey asserted these reforms “were more overdue than even the labour reforms as the existing laws kept the Indian farmer enslaved to the local Mandi and their rent-seeking intermediaries”. “The agricultural reforms enable the farmer to sell where he gets the best deal and thereby enable competition that is sine qua non to create welfare for the small farmer”.
Another key inference in the survey is that the lockdown had a causal impact on saving lives and the economic recovery. “India thus benefited from successfully pushing the peak of the pandemic curve to September 2020 through the lockdown. After this peak, India has been unique in experiencing declining daily cases despite increasing mobility.”