Covid Lessons for Economy

Context – understanding the role of fiscal space in pushing the growth in coming years.

Debate about Fiscal Space

• Monetary Policy may have fiscal space to expand with less efficacy. However, Fiscal Policy may have efficacy with less fiscal space to expand.

• Mooting questions: How much it should go up. How will it be financed

Debt to GDP ratio as a indicator

• Government’s intertemporal budget constraint and debt to GDP ratio (70%) are good indicator to predict the future growth of economy.
• Trajectory of debt/GDP matters more than the level that impacts future growth.

Debt as a function of following variables

• Primary Deficit: High Primary Deficit worsen the debt burden.
• Relationship between nominal GDP growth and the government’s cost of borrowing: Higher is the difference between growth and cost of borrowing, the greater is the depreciation of the existing debt stock.

Fiscal Space – in future depends on

• Depends on potential growth in coming years.
• The more that India’s policy response can preserve, protect and boost medium-term growth — both through the nature of the policy intervention this year and the accompanying reforms — the larger the fiscal response India can mount.

Potential Policy Intervention

• Ensuring all viable enterprise can survive the pandemic.
• Government’s credit guarantee scheme: important to keep the business afloat.
• Financial Sector contribution to economic recovery: Bond market interventions (special liquidity and partial guarantee funds) to ease conditions at the financial periphery.
• Recapitalising public sector banks: for growth and resolution capital, conducting an AQR (Asset Quality review) for the NBFC sector, converting well-run NBFCs into banks to avail of a stable deposit franchise, and modifying the incentives under which public sector banks operate.
• Utilise the opportunity to integrate with Asian supply chain.
• Revisit Special Export Zone (SEZ) model: help create discrete ecosystems within the country that enable globally competitive export production.
• Investment in social infrastructure (Health and Education): take the pressure off the fiscal and financial sectors.