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.