Strategy Choices for India to Recover from Reccession

Newspaper Rainbow Series     15th May 2020     Save    
QEP Pocket Notes

Context: Among health, humanitarian and economic crisis, worst is the economic crisis that requires an extraordinary source of finance form feasible fiscal stimulus and fiscal expenditure. 

Pandemic Induced Crisis

  • Health Crisis: in terms of infrastructure, doctors, protection equipment’s, spike in deaths rates 
  • Humanitarian Crisis: job losses of daily wage and migrant workers, no transport during lockdown, exhausted savings
  • Economic Crisis:
        • Unprecedented  Unemployment Rate: 27% (Centre for Monitoring Indian Economy).
        • Fall in Gross Domestic Product (2020-21): 13% in absence of a macroeconomic stimulus as per National Council of Applied Economic Research

      Governments Fiscal Expenditure

      • Total Governments expenditure stimulus would amount to more than 6% of GDP.
      • Feasible Fiscal Stimulus: Medium fiscal expenditure (3% of GDP) instead of higher one (5% of GDP) would result into relatively lower inflation, recession, fiscal and current account deficit.

      Channels for Funding Total Borrowing Programme of Government

      • Commercial Banks: Central Government for them and on the behalf of state government (suspension of Fiscal Responsibility and Budget Management Act) should first borrow from commercial banks.
      • Limitation: Excessive borrowing would push up yields and crowd out the private sector.
      • Reserve Bank of India’s Ways and Means Advances:  Increase ceiling of Ways and means advances for a longer period (one year), after which advances can be converted into long-dated securities.
      • Private Placements: Central bank to directly monetize the residual part of the deficit through private placements as a one-time arrangement. 

      Way forward

      It would be fiscally prudent and economical feasible to spread borrowing over two years (2020-21 and 2021-22) to restore macroeconomic stability.

      QEP Pocket Notes