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MERE GOVT. SPENDING WILL NOT HELP ECONOMY

Focus: GS-III Indian Economy

Introduction

In the wake of the economic crisis, many have asked for higher government spending to bail out the economy.

Why can’t the government just spend to revive growth?

  • First, in all likelihood, temporary incomes coupled with job/income uncertainty will induce precautionary savings without any impact on growth.
  • Second, the fiscal situation was weak even before the pandemic.
  • With revenues having cratered, funding of additional expenditure is through higher borrowings.
  • Any incremental debt should be seen in the context of future investments being hampered due to current consumption.

Foresight

  • We should note that India’s public debt/GDP will likely reach around 85 per cent and the consolidated gross fiscal deficit to GDP ratio could be around 12.5 per cent this year.
  • Assuming gradual fiscal consolidation, these metrics will take quite a few years to revert to pre-COVID levels. Rapid consolidation will adversely impact growth.

Broaden the Consumer Base

  • Some economists argue India needs to broaden its consumer base beyond the top 10- 20 per cent of the population to improve long-term growth prospects.
  • This cannot happen with regular doses of consumption stimulus but through creating steady and well-paid employment for the bottom and middle segments.

What should be done?

  • Ideally, most public spending should be directed towards sectors such as roads, railways, infrastructure, healthcare and educational facilities to help rebuild the economy.
  • To promote infrastructure creation along with private sector participation, the government needs to charge an economic price for goods and services such as power, irrigation, and public utilities, establish the rule of law with minimal interference in pricing, streamline processes for quick approvals and ensure timely payments to private operators.
  • To achieve economic growth of 7-8 per cent that is sustainable over the next decade, the government needs to start addressing some of the traditional sore points such as the large infrastructure deficit, the weak financial sector, archaic land and labour laws, and the administrative and judicial hurdles.

-Source: Indian Express

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September 2022
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