Freezing in Cold War 2.0

Context: Both domestic and global developments suggest not just a temporary Covid-19 blip, but permanently slower growth for India and the world.

Challenges before the Economy due to COVID:

• Crash of Gross Domestic Product: GDP will crash this year by anywhere from 5% to 10%.

• Collapsing Revenues
• Increase in relief spending: will vastly exceed any spending cuts or new taxes on oil.

• Fiscal Prudence: The Fiscal Responsibility and Budget Management (FRBM) targets have not been achieved 12 years after the deadline.

• Reduced investments: The N K Singh Committee in 2017 opted for a gradual glide of the central fiscal deficit from 3.5% of GDP in 2016-17 to 3% in seven years, which will reduce future investments.
• Rising Debt to GDP ratio: The committee suggested reducing the debt-GDP ratio to 40% for the Centre and 20% for the states by 2023, adding up to the national ratio of 60%.

• The combined effect of crashing GDP and rising fiscal deficits will push up India’s debt-GDP ratio from 72% to, maybe, 85-90% in just one year.
• More Debt Servicing: by the Reserve Bank of India means less money for essential public investment in everything from health and education to infrastructure.

• The monetisation of Deficit not made for India: Unlike rich countries like the US, Japan and Britain are believed to have the capabilities to print more money without causing inflation.

• Excess money-printing will depreciate the exchange rate, raising the rupee value of existing foreign debt and the annual cost of servicing it.
• For E.g. 

• RBI’s loosened monetary policy has already hiked rupee from Rs 68 to Rs 75 to the dollar.
• In the west, inflation remains near-zero. But in India, inflation is almost 7%, well above RBI’s 2-6% target.

• Issues with Equity and Borrowings:  They need to be serviced, which requires increasing value exports.

• India’s export growth has been close to zero since 2013, and world export growth has been only a bit higher.

• Rising Protectionism and Cold War 2.0: 

• Politically, the world is turning inward rather than outward. For, E.g. ????

• Donald Trump’s ‘Make America Great Again’ 
• Narendra Modi’s ‘Atmanirbhar Bharat’.

• Cold War against China: 

• Suspicions of Chinese security devices have resulted in US trade and investment curbs, which could wreck global value chains.
• India is deliberately delinking economically from China.