The Contours of Recovery

Context: Pandemic induced economic crisis requires sector-specific reforms apart from the fiscal stimulus package for sustained economic growth in the post-COVID era.

Fiscal Stimulus Package: Increase in government expenditure over and above the base level acts as a stimulus

• based on the traditional Keynesian approach it can be divided into a budgetary (15%) and a non-budgetary expenditure (85%, liquidity measures for banks and NBFCs).

Issues in Fiscal Stimulus 

• Fiscal stimulus in the absence of production activities: will not accelerate economic growth (as industries and service providers are locked in an input-output system).

• Total public sector borrowing requirements: may exceed available sources of financing consisting of the financial savings of the household sector, public sector, and net capital inflows.

• An increase in gross borrowing: may lead to a high fiscal deficit.

• High fiscal deficit (6.7-7% of GDP): might alter the composition of government expenditure (reduced fertiliser and petroleum subsidies and increased health expenditure).
• Anti labour stance: Freezing of increments of dearness allowance and dearness relief components (salaries and pensions)
• Budgetary contribution to infrastructure (only 1.25% of GDP): indicates poor quality of fiscal deficit. 

Way Forward

• Expenditure restructuring: by increasing infrastructure spending (health infrastructure) and accruing benefits of higher multiplier effects associated with capital expenditures. 
• Investment augmentation: to support demand, employment, and income generation.
• Support to demand: not only from the center but also from states (additional borrowing: 2% of GSDPs) and Public Sector Undertakings (PSU).
• Monetizing fiscal deficit.
• The regime of controls and permits: should be brought to close.
• Sector-specific reforms: applying principles of liberalization to sectors such as agricultural marketing, power, and telecom sector.
• Consensus-based uniform labour reforms: for small and marginal farmers.