Challenge to economic recovery: Govt curbing expenditure to create headroom for dovetailing stimulus package

Alongside the redflags over growth, concerns being raised over the likelihood of the debt-GDP ratio breaching the notional red line of 80 per cent from the current level of around 70 per cent is now being questioned by economists, who point to the perils of being sole focussed on the debt numbers rather than the immediate task of rekindling GDP growth.

Former Chief Statistician of India Pronab Sen said debt sustainability always remains a concern, but holding down the debt levels should not compromise on GDP growth for which government expenditure is essential. “Holding the debt down in a situation where the GDP is low, maybe continues in the negative, doesn’t help you. You can still become unsustainable. So it’s a call. If I increase my debt stock, not the ratio, then if the GDP starts growing strongly, it will become sustainable. But the whole issue of debt sustainability is a long-term process… People are talking about 80 per cent. There is no such number. The number really has to do what the nominal GDP would be doing over a long period of time. If by holding down the debt, the GDP growth gets compromised, then you may be moving in the wrong direction altogether,” he said.

The government’s fiscal stimulus in the wake of the COVID19 pandemic has been restrained with limited cash outgo, a factor which economists said has been driven by the concerns of the debt levels, possibility of exceeding fiscal deficit target by a huge margin and the consequent actions by rating agencies. However, the economic costs of reining in debt are being seen as high in terms of unemployment and loss of lives and livelihood.

Schemes that were part of the stimulus package such as the distribution of funds to Micro, Small and Medium Enterprises under the 100% Emergency Credit Line Guarantee Scheme are struggling to take off, with banks managing to disburse a little over 7 per cent of the amount earmarked under this head over the last one month. For MSMEs, hit hard by the pandemic lockdown, credit continues to be a challenge amid the slump in demand. Official data shows that as of June 18, state-owned banks sanctioned loans worth Rs 40,416 crore under the scheme, of which Rs 21,028.55 crore has been disbursed, which is a little over 7 per cent of the Rs3 lakh crore package under this head.

Government spending has to increase substantially, Sen said, adding that once the economy recovers and private investment starts picking up, then the government could start the fiscal consolidation. “Then you bring down the fiscal deficit, and start lowering your debt-GDP ratio. But to hang around and hope that the economy bottoms out by itself, it may work in the long term but the interim costs in terms of employment, people’s livelihoods, perhaps even lives could be very large. So, what is more important, debt sustainability which is something which will hit you much later in time or the tragedy that’s playing out today,” he said.

An aggressive fiscal policy is the need of the hour and since the revenue slippage estimates are already high, fiscal deficit is anyway going to get pushed to significantly higher levels, said State Bank of India’s Group Chief Economic Adviser Soumya Kanti Ghosh. “It is not the right time to have discussions about the ideal debt-GDP ratio. Of course it will deteriorate. Now it’s around 72 per cent, it could go beyond 80 per cent, a large part of that would be because of GDP decline. We should now instead think about growth numbers,” Ghosh said.

Ghosh further said that the revival of economy is 60-70 per cent of the sub-optimal level that it was already operating at before the outbreak of the COVID-19 pandemic. “Now we have reached 60-70 per cent of that sub-optimal capacity and this increase in demand is a reflection of pent-up demand. Beyond this, there is a definitive need for more policy measures to take it beyond these levels. Don’t think too much fiscal conservatism will help at this point of time,” Ghosh said.

He added that the talks of V-shaped recovery are going to be driven more due to statistical impact resulting from a contraction this financial year. “There is talk about V-shaped recovery. This could be a statistical artefact, if the country experiences say a 5 per cent contraction this year, next year the economy can grow 6-7 per cent but that will only take it back to what would have been the 2020 level. We expect the economy to undergo a swoosh shaped recovery and it should be our endeavour to pull up the right side of such swoosh shape,” he said.

India’s fiscal metrics have worsened sharply, the government’s expenditure restraint notwithstanding, due to the impact of the sharp growth slowdown on revenue, public-sector debt numbers and the fiscal deficit. More than the deficit, though, rating agencies are watching the deterioration of India’s fiscal metrics in ‘the context of a prolonged or deep slowdown in growth’, which “would invite a ratings downgrade”, as ratings agency Moody’s warned in their note on India’s outlook on May 8. The effort to revive growth, thereby, is a more crucial metric given that practically all countries are bracing for a worsening of their respective deficit positions. The IMF’s latest projections for debt numbers, published in April, showed that debt-GDP levels are expected to worsen for almost all emerging markets this year.

The IMF Wednesday projected a sharp contraction of 4.5 per cent for the Indian economy in 2020, a “historic low”. The Asian Development Bank had, last week, said the Indian economy will contract by 4 per cent in FY21. Fitch expects the Indian economy to contract by 5 per cent in FY21 before rebounding by 9.5 per cent in FY22, fuelled mainly by the low-base effect.