Getting out of the ‘guns, germs and

Context: Due to the gravest confluence of military, health and economic crises ,India has been threatened with multiple challenges which requires immediate attention . 

Challenges for India:

• Strain on financial resources: Chinese conflict will stretch central government finances by an additional 2% of GDP, for its defence preparedness.

• For example:

• India’s defence expenditure in the Kargil war year shot up by nearly 20% from the previous year. 
• It also forced the government to increase India’s defence budget for the next financial year to 2.7% of nominal GDP.

• Low health care expenditure: The combined public health expenditure of States and the central government in India is a mere 1.5% of GDP as compared to China’s at 3%. 

• The central government will need additional funds of 1 % of GDP to fight COVID-19.

• Declining Economic indicators:

• Low consumption spending: The lockdown affected people's spending for two months, which will contract India’s economy in nearly five decades.
• For every ?100 in incremental GDP, ?60 to ?70 comes from people’s consumption spending.

• Falling external trade: India’s trade levels had fallen from 55% of nominal GDP in 2014 to 40% in 2020. 

• Investment is not a viable option at this stage since the demand for goods and services has fallen due to lockdown.
• Junk rating risk: International rating agencies will likely downgrade India’s investment rating to “junk” due to rising debt levels, which will trigger panic among foreign investors. 

WAY FORWARD:

• Increase consumption demand:  The government needs to inject incremental funds (akin to the New Deal in the US) of 5 % of GDP to absorb the economic shock and kick start the spending cycle again. 

              Options available:

• Putting the money in the hands of the needy to stimulate consumption.
• Embark on a massive government spending. 

• Exploring new sources of revenue: 

• Taxation: Such as a wealth tax or a large capital gains tax for the medium term.

• This is because: The government needs to spend an additional 8% of GDP to overcome the crisis while revenues will be lower by 2 % of GDP this year (budgeted at 10% of GDP).

• Borrowing: The Reserve Bank of India can create money and transfer it to the government.

• It is the best course of action is to pull India out of the crisis and deal with the consequences of a potential “junk” nation label.