Covid Lessons for Economy

The Indian Express     19th May 2020     Save    
QEP Pocket Notes

Contextunderstanding the role of fiscal space in pushing the growth in coming years.

Debate about Fiscal Space

  • Monetary Policy may have fiscal space to expand with less efficacy. However, Fiscal Policy may have efficacy with less fiscal space to expand.
  • Mooting questions: How much it should go up. How will it be financed

Debt to GDP ratio as a indicator

  • Government’s intertemporal budget constraint and debt to GDP ratio (70%) are good indicator to predict the future growth of economy.
  • Trajectory of debt/GDP matters more than the level that impacts future growth.

Debt as a function of following variables

  • Primary Deficit: High Primary Deficit worsen the debt burden.
  • Relationship between nominal GDP growth and the government’s cost of borrowing: Higher is the difference between growth and cost of borrowing, the greater is the depreciation of the existing debt stock.

Fiscal Space – in future depends on

  • Depends on potential growth in coming years.
  • The more that India’s policy response can preserve, protect and boost medium-term growth — both through the nature of the policy intervention this year and the accompanying reforms — the larger the fiscal response India can mount.

Potential Policy Intervention

  • Ensuring all viable enterprise can survive the pandemic.
  • Government’s credit guarantee scheme: important to keep the business afloat.
  • Financial Sector contribution to economic recovery: Bond market interventions (special liquidity and partial guarantee funds) to ease conditions at the financial periphery.
  • Recapitalising public sector banks: for growth and resolution capital, conducting an AQR (Asset Quality review) for the NBFC sector, converting well-run NBFCs into banks to avail of a stable deposit franchise, and modifying the incentives under which public sector banks operate.
  • Utilise the opportunity to integrate with Asian supply chain.
  • Revisit Special Export Zone (SEZ) model: help create discrete ecosystems within the country that enable globally competitive export production.
  • Investment in social infrastructure (Health and Education): take the pressure off the fiscal and financial sectors.
QEP Pocket Notes