Economic Survey 2021: Need for More Active, Counter-Cyclical Fiscal Policy

Story Highlights
  • Economic Survey highlights the desirability of using countercyclical fiscal policy to enable growth
  • It has asserted the Covid-19 pandemic that has created a significant negative shock to demand
  • The survey ensures that the full benefit of seminal economic reforms is reaped by limiting potential damage to productive capacity

New Delhi: According to the Economic Survey tabled in Parliament on Friday, India’s primary deficit (Centre and states) for FY21 is assumed to be 6.8 percent of GDP. It has been suggested that the growth recovery will be driven by government consumption. The Economic Survey 2020-21 was tabled by Finance Minister Nirmala Sitharaman in Lok Sabha today, where she revealed that the net exports and government consumption have cushioned the growth from the further plunge.

Given the need for fiscal spending amidst the COVID-19 crisis, the Economic Survey examines the optimal stance of fiscal policy in India during a crisis and concludes that it is growth that leads to debt sustainability and not necessarily vice-versa. This is because debt sustainability depends on the “Interest Rate Growth Rate Differential” (IRGD) i.e. the difference between the interest rate and the growth rate in an economy. With the Indian context of potential high growth, the interest rate on debt paid by the Indian government has been less than India’s growth rate by the norm, not by exception.

The Economic Survey points out that fiscal multipliers are disproportionately higher during an economic crisis than during economic booms. Thus, as the COVID-19 pandemic has created a significant negative shock to demand, an active fiscal policy can ensure the full benefit of seminal economic reforms taken by the Government. As the IRGD is expected to be negative in the foreseeable future, a fiscal policy that provides an impetus to growth will lead to lower, not higher, debt-to-GDP ratios.

According to the Survey, simulations were undertaken till 2030 highlight that, given India’s growth potential, debt sustainability is unlikely to be a problem even in the worst-case scenarios.

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