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Explained Ideas: What will drive India’s growth going forward?

What would reassure markets and avoid further credit rating downgrades is not lower fiscal spending, but a strategy to revive growth, combined with a credible fiscal plan for the medium term, writes Prachi Mishra

By: Explained Desk | New Delhi |
Updated: August 10, 2020 7:43:39 am
Prachi Mishra, Prachi MIshra opinion, GDP, India's GDP, India GDP growth, India GDP coronavirus, India GDP coronavirus pandemic, Explained Economics, Express Explained, Indian Express Market participants also wonder why India has not seen more aggressive fiscal policy support.

Prachi Mishra, chief India economist, Goldman Sachs, projects that India’s real GDP would contract by 4.4 per cent in FY21; this would be the deepest recession India has witnessed since 1980.

The key question that markets are confronted with is — what will be the key macroeconomic drivers of Indian growth  going forward?

More from Explained | Why are forex reserves shooting up when Indian economy is hit?

“Discretionary fiscal policy support, defined as targeted support to households and businesses, the kind of policy support that can revive any economy quickly in times of an unprecedented shock like we have seen, is tepid in our view,” she states.

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“Indeed, credit rating agencies appear to be less worried about the worsening of fiscal and debt positions in the short-term — in fact, it is the reverse. They appear to be more concerned about the fact that India may not have the administrative and fiscal capacity to implement large fiscal support, and that would be a headwind to growth,” she writes.

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What would reassure markets and avoid further credit rating downgrades is not lower fiscal spending in the short-run as many perceive, but most importantly a strategy to revive growth, combined with a credible fiscal plan for the medium term.

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Market participants also wonder why India has not seen more aggressive fiscal policy support, not only compared with advanced economies but with other emerging economies too, and given the nature and scale of the shock.

Don’t miss to read | ExplainSpeaking: State of the Indian economy in 6 charts

One possible explanation — an underlying implication of Viral Acharya’s recent book Quest to Restoring Financial Stability in India — is that fiscal dominance during normal times, which basically allowed the sovereign to run about 10 per cent deficits, implies that the government’s ability to apply countercyclical policy is severely curtailed during a crisis.

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“In the short term, the economy has to pay a price. The price of not saving and investing in an umbrella when there is sunshine is that we have to bear the costs when it is raining,” she writes.

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First published on: 10-08-2020 at 07:40:53 am
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