From UPSC perspective, the following things are important :
Prelims level : Deficit financing through the RBI. Deflation.
Mains level : Paper 3- Necessity of stimulus package and risks involved in it.
This editorial spells out the size of the stimulus package that would be required to restart the economy. It also discusses the possible sources that the government could tap to raise the revenue. Such huge expenditure is likely to result in the huge fiscal deficit which would necessitate that the stimulus is time-bound and transparent.
Prospects of substantially negative growth
- Arvind Subramanian has likened the current economic situation to a “pralay (deluge)”.
- A deluge in which the government should spend more than even what it ought to in a rainy day.
- India, the former chief economic adviser said that India must plan for a “substantially negative” growth this year that might require an additional fiscal expenditure of Rs 10 lakh crore.
- Corporate indebtedness was already high before the lockdown.
- Insolvency cases will mount further.
- Even companies facing no significant cash flow issues wouldn’t invest in uncertain public health as well as the demand-constrained environment.
- Banks, too, aren’t going to lend, no matter how much liquidity the Reserve Bank of India (RBI) may infuse.
- The burden of non-performing assets, which is set to get heavier in the coming months, makes it impossible for them to finance an economic recovery.
- Last, but not the least, are faced with layoffs and pay cuts, they would rather save and will be afraid to spend.
Importance of government spending in the current situation
- Under the circumstances, the onus for ensuring that the wheels of the economy start moving lies on the government.
- There’s no guarantee of it happening even with all lockdown restrictions being lifted.
- Without somebody to spend, the economy is in real danger of contraction, which will, in turn, worsen the problem of businesses going bust, joblessness and loan defaults that can spread to the entire financial services industry.
No “3F” constraints and risk of deflationary shocks
- The one consolation today is that India is not saddled with its traditional “3F” constraints — food, fuel and foreign exchange — which were triggers for inflation and balance of payments crises.
- On the contrary, public foodgrain stocks are at an all-time high, global oil prices have crashed and there is no run on the rupee, unlike during the “taper tantrum” period of May-August 2013.
- Risk of deflationary shock: The risks, if at all, are tilted more towards demand-side “deflationary shocks” than supply-side inflation concerns.
How will the government manage the resources?
- The finances of both the Centre and states are in a mess, with receipts from tax and non-tax sources hardly covering even existing expenditures.
- But governments enjoy sovereign borrowing powers that allow fund-raising at rates below that of triple A-rated instruments issued by private corporates, more so in the present risk-averse scenario.
- Also, there is the option of deficit financing (“printing money”) through the RBI subscribing to primary auctions of government securities.
- There are, of course, costs in such powers being exercised.
- Past precedents — whether the issuance of ad hoc Treasury Bills to the RBI prior to April 1997 or the stimulus package post the 2008 global financial crisis — do not inspire confidence.
A question based on the stimulus package and its consequences can be framed, for ex- “Do you agree with the view that a stimulus package by the government to restart the economy is necessary? What are the options with the government to raise the money for such a package? What could the consequences of such a package on the economy in the future?”
This is the time to design clear rules for departure from accepted norms of fiscal prudence. Any stimulus has to be transparent and time-bound.