Crisis Without Villians

The Indian Express     17th August 2020     Save    

Context: Current economic crisis is different from the previous ones. The government should borrow and spend.

Unprecedented Nature of the Present Economic Crisis 

  • Not a supply-side issue: Unlike previous crisis which was induced due to supply-side constraints related to food, forex and balance of payments (BOP). 
    • For E.g. the bumper harvest of food grains has led to stock rising to 2.3 times the required level in July as against the drought-induced de-growth in 1972, 1965 and 1957.
    • Forex reserves have risen to an all-time high of $538.19 billion in August 2020.
    • The Jan- March quarter was the first in 13 years to have recorded a current account BOP surplus.
  • Demand-side uncertainty: present economic contraction is classic “western-style” demand slowdown 
    • Post COVID-19 has turned into a recession bereft of consumption and investment demand.
    • Rise in cash conservation due to uncertainty about jobs and incomes.
  • Rising savings but reduced Credit Growth:
    •  Aggregate deposits with the commercial banks as of July 31 were Rs 14.17 lakh crore or 11.1% higher than a year ago.
    • The corresponding credit growth has been just Rs5.37 lakh crore or 5.5%.
  • Reduced spending and investment leads to a further contraction of incomes and is bound to squeeze out savings as well.

Critical analysis of the reasons behind low Government Spending

  • False hope regarding the revival of investment and growth in the post-pandemic era. 
      • This assumes that the economy wasn’t struggling in the pre-COVID era, while the truth is that the growth had already slid to 3.9% in 2019-2020.
  • Limited fiscal space:  While it is true that the fiscal deficit stood high at 4.6% in 2019, there has been a decline in the debt-GDP ratio also. 
  • Centre’s outstanding debt-GDP ratio has come down from 56.9 to 49.25% between 2008-09 and 2018-19.

Way Forward: Governments should borrow and spend and need not to worry only about GDP growth, real and nominal.

  • Borrow Sustainably: sustainable public debts are possible, provided governments can borrow at rates below nominal GDP growth (i.e unadjusted for inflation).
  • While the nominal GDP stood at 7.2% between in 2019, the weighted average interest rates on government securities remained higher.