Loosen the Purse Strings

Context: Given the limitations of monetary policy, a fiscal push is crucial for sustained growth recovery.

State of Indian Economy

• Expected contraction for current fiscal year: Economy is estimated to contract by 8 % mainly due to contraction of private final consumption expenditure. 
• Growth of Gross value added (GVA) at basic prices: by 1% (favoured by growth in agriculture along with five other sectors)
  • Public administration, defence and other services continued to contract.
  • Mining and quarrying had registered a contraction of 1.3%.
  • Manufacturing - 5.2% and electricity, gas, water supply and other utility services and construction moving into the red.
• Expected positive growth for 2021-22: Due to the big base effect- Economic Survey and the Union budget anticipate a growth rate of 11 %and 10.5 %, respectively, for the next year.
• Income loss: This is especially true for those in the informal and the Micro Small & Medium Enterprise (MSME) sector due to a slow growth rate.

Significance of Union budget 2021-22 for a sustained growth recovery:

• Adequate emphasis on capital formation.
• Rethinking on “fiscal rules”: deficit financing for enhanced growth.
  • Announced a high fiscal deficit of 9.5 % of Gross Domestic Product (GDP) in revised estimates (RE) for 2020-21, against the pegged deficit of 3.5 % in budget estimates (BE) 2020-21.
  • Road map to bring down high fiscal deficit to 4.5 % of the GDP by 2025-2026.

Arguments favouring deficit financing for enhanced growth

• High deficits have no fiscal costs:  if they can be substantiated with increased public investment or “output gap” reduction.
  • i.e. if the real interest rate is not greater than the real rate of growth of the economy.
• To compensate for the limitations of monetary policy: in triggering growth through policy rate adjustments (since it has to take inflation into account), a fiscal push is needed for sustained growth recovery.