Why so afraid of spending

Context – Government should focus more on spending to create demand in the economy.

Reluctance to spend from Government side

• Downgrade of rating: High fiscal deficit, high public debt and shrinking GDP may lead to sovereign downgrade of rating.

• Above risks are less damaging than the damage done by prolonged recession.

• Political interests: Tax relief to tiny group may trigger demand but politically risky.

Managing the Ratings

• Sovereign rating: it measures the ability of sovereign to pay aback. 

• Its downgrade will make foreign loan expensive and weaken the currency.

• Country rating: It assesses a country’s long-term potential. 

• It is important and can be preserved if government pursues reforms, generates demand, and supports states for far-reaching changes in agriculture.

Recent Measures and issues related to it

• Government is pushing for cheaper loans, but Companies cannot borrow when there is no demand.

• RBI has cut policy rates but did not let banks rejig loans without categorising them as Non-performing Assets. 

• It will force companies to pay earlier loan from the newly reviewed loan and left very less to invest in business.

• MSME: 3 lakh crore guarantee packages announced. But it is not clear on its calculations

• Total SMA0 and SMA1 loan of MSME is estimated at 10 lakh crores. Covering 20% of guarantee will not exceed 2 lakh crores.

Way Forward

• Missing piece of demand should come from higher government spending and easier regulation.
• Money received by NBFC from special RBI backed fund should be rolled as soon as possible.
• Government should be ready to spend sooner than later rather be remembered as a prisoner of rigid beliefs.