20/05/2020 - Indian Economy

KEY POINTS

·         The evolution of debt is essentially a function of three variables: The primary deficit (fiscal deficit net of interest payments) and the relationship between nominal GDP growth and the government’s cost of borrowing. The higher is the difference between growth and cost of borrowing, the greater is the depreciation of the existing debt stock.

·         That even under relatively benign scenarios (nominal GDP growth of 4 per cent and a fiscal expansion of 3 per cent of GDP this year) India’s debt/GDP will balloon towards 80 per cent by the end of the year. But India will not be alone. Public debt is expected to balloon all over the world. Instead, what will matter for sustainability is the trajectory of debt thereafter.

·         Policy must ensure that all viable enterprises can survive the pandemic. If economically-viable but illiquid small and medium enterprises go under, the implications both for unemployment and India’s underlying production capacity could be severe.

·         The government’s credit-guarantee scheme is, therefore, very important and should hopefully induce banks to provide much-need working capital to keep small businesses afloat.

·         It will be equally important, however, to jumpstart a risk-averse financial sector into funding an economic recovery, more broadly. Bond market interventions (special liquidity and partial guarantee funds) are important to ease conditions at the financial periphery.

·         Pre-emptively recapitalising public sector banks for growth and resolution capital, conducting an AQR for the NBFC sector (once the dust settles from the panic), then converting well-run NBFCs into banks to avail of a stable deposit franchise, and modifying the incentives under which public sector banks operate will be crucial to strengthening the financial sector.

·         But real reforms must accompany those in the financial sector. The government’s announcement on unshackling agriculture — if carried through to its logical conclusion — is potentially game-changing for farmers and will be a landmark reform for the sector. But reforms are a process, not an event.

·         As COVID-19 hastens the reorganisation of supply-chains within Asia, India must seize the moment to integrate into the Asian supply chain. If the first one or two SEZs succeed, it would create a powerful demonstration effect both externally (to help attract more firms into India) and internally (inducing different states to compete to create their own SEZs to drive jobs and investment).

·         Existing assets on the public sector balance sheet must be aggressively monetised to fund growth-enhancing investments in physical and social infrastructure. This will simultaneously take the pressure off the fiscal and financial sectors, and deliver a productivity-enhancing swap on the public sector balance sheet.

Kindly give feedback

The corona crisis has made people and governments all over the world realize the importance of physical and social imfrastructure. 

              India must monetise existing assets in the public sector to fund growth-enhancing investments in physical and social infrastructure, because :

- India will not be able to fundamentally alter its growth potential without crucial investments in health and education.

- Liquidity give way to capital and reform.

- Investments in public health and education systems played a bigger role in improving life expectancy than gains in income.

         Yet, the improvements in health and education systems were not uniform with some developing countries such as India lagging behind others in ramping up their social infrastructure. 

- wrong public health strategy is one reason for India’s vulnerability, along with the lack of resources - as government spending on health accounts for an abysmal 1%.

- The low priority accorded to health has translated into limited investments in both health infrastructure and health data.

- Finally, it is not just government apathy that has made India so vulnerable to health shocks. India’s elites may have also played a part in demanding greater funding for big hospitals (tertiary care) rather than seeking more investments in preventive public health interventions.

                Covid-19 has shown that the health of each member of a society impacts that of the other. And without health, it is not possible to create wealth, the current lockdown to fight the pandemic shows.

>>> Conclusion : 

The government must consider and explore all the possible avenues, so that they could not have severe consequences for the economy in the future.