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Recession? Here’s how India can spend its way out of it

Pramila Deshpande
·3-min read

With the end of this financial year, India may have to recuperate by roughly a 10 percent negative spike in its Gross Domestic Product growth.

After staggering on the fiscal stimulus plan for almost a year, Nirmala Sitharaman, India's finance minister, announced that the country is increasing expenditure to revive growth in the upcoming budget.

Moreover, it would not allow any number of budgetary deficits.

The government expects that growth will yield higher tax revenues, which will soon help to repay the debts. Most economists say that, at this point, the government has no other option than to strategically invest the borrowed funds.

To prevent a stagflationary trap, the government would have to ensure that its expenditure boosts with economy-wide competitiveness and help revenue-generating potential.

As reported by the International Monetary Fund in October 2020, India's public debt-to-GDP ratio has soared to 89 percent. It will continue to remain at the same level at least till 2025, making India one of the most indebted countries among the largest developing economies.

India will have to consider some measures for finding its way out of the great recession.

Cautious borrowing

Weak domestic consumption, low growth in exports, and depressed private investment mean that three of India's development engines are stuttering today.

Government expenditure could be the prime driver of economic revival and growth. The need of the hour is to not only invest more, but to invest wisely.

As far back as in 2014, Chief Economic Advisor of the Finance Ministry, Arvind Subramanian, had expressed the need for government expenditure to accelerate growth. Yet, private capital expenditure had already slowed down.

Nonetheless, the years since then have seen only a partial attempt to drive public investment, with most government expenditure targeting current or revenue costs.

This further means that increased borrowing and spending have contributed to the amount of public debt without substantially improving inflation or productivity. The government has borrowed only to meet the current expense rather than to invest for upcoming years.

Rigorous selling

Since the government is already cash-strapped, the government cannot accelerate the country's capital costs cycle by relying on depleted public sector outfits or granting support to such businesses.

On the other hand, selling stakes in public sector units to collect budgetary resources and drive capital investment in such firms by introducing private management could make much sense for the government.

Smart investing

Excess money supply can hinder financial stability as well. Banks are outbidding each other to offer loans at rates lower than bond market rates in the light of increasing liquidity. This could result in asset-liability disparities and increase structural problems until the excess liquidity is stopped.

The Reserve Bank of India has to take more steps to limit the liquidity for managing normalcy.

Increased unemployment

Many people have already lost their jobs, and businesses will want to eventually do away with a few of the jobs that have been lost even when the economy returns to work.

The government should help large groups of unemployed workers to learn new skills for increasing competitiveness in critical sectors.

Reduced agriculture growth

The administration activities for enhancing agricultural productivity should be supported and built upon. Increased productivity should help improve the condition of agriculture, and opportunities should be given for them in rural areas.

Unmanaged climate crisis

At last, the climate crisis will be a part of the Green Economy program, post-pandemic. Some of the expenditure should also be utilized for the infrastructure to decrease transaction costs and increase productivity.

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