While the Covid-19 pandemic has managed to disrupt a whole host of things and compelled the mightiest to bow down, the most prime victim has to be the government, especially in India. The Government of India (GoI) has been subject to a lot of flak, primarily on the coronavirus recovery process. The economic stakeholders are not happy with the ground reality and to be fair, numbers convey the same. For a financially modest economy like ours, the fight against humankind’s worst health crisis is turning out to be tougher and tougher. Notwithstanding the multitude of stimulus measures announced by GoI to rev up the Indian economy, not much progress has been achieved. The question now arises is, how is the government able to fund these stimulus measures, given the economic downturn at hand?
Yes, you must have guessed it right- public debt. At the status quo, GoI has ramped up disproportionate amounts of debt in order to blow life into the lofty fillip measures they have in place for the welfare of the economy. The borrowing is so rampant that midway through the financial year, GoI has already crossed the budgeted figure it had planned to borrow for the entire fiscal. It seems that GoI is spreading its legs beyond the coverlet, which might prove detrimental to the broader cause going forward. The next question that demands attention at this juncture is- what are the ramifications of such excessive fiscal debt?
Even if you haven’t got this right, this is something fondly talked about-inflation. This is surely not the only side-effect to the act of incessant borrowing, but arguably the single-most imperative aspect. Again, the numbers say it all. The level of inflation that the country has witnessed over the past three months is alarming in many ways. Except, neither the Reserve Bank of India (RBI) nor the GoI can do much about it. While we, as economic participants, obsess over Gross Domestic Product (GDP) numbers, I feel there lies a greater problem with inflation. The reason for that is if one looks at the data apropos the Consumer Price Index (CPI), which is the key metric for gauging inflation, one would notice that food inflation is the highest amongst all. Now, that is a problem because food is the primary source of sustenance and if poorer families in the country are deprived of this basic necessity of life, prosperity shall be never be met with.
In a recent interview, when asked about the same issue, Dr. Raghuram Rajan had a very interesting concept to explain the conundrum. It is called the Fiscal Theory of the Price Level. The concept essentially talks about the interlinkage between government liabilities and general price levels (read inflation). The idea is that if the government keeps piling on large amounts of debt against an almost constant stream of revenue inflow (such as tax revenues, import duties, and so on) it will pave way for higher inflation levels. The rationale being the government will invariably get into a mechanism of structural deficit, wherein in order to have the taps running, they keep refinancing their loans or print money to pay off the debt. Either of them leads to heightened levels of inflation. However, this has to be consumed with a pinch of salt, as various factors determine the fate of an economy.
To put things into perspective, it is only plausible for GoI to go ahead and boost government expenditure to get the economy out of the woods. But, it needs to be mindful of the traces it leaves behind to ensure nothing comes back to haunt growth prospects. More importantly, I reckon the current plight besides that of extravagant borrowing is also with the way expenditure is being made on the government’s part. At this point in time, the focus shall be more on the quality of measures rather than their quantum. The day we realize that the responsibility of achieving state welfare is not just that of the government but equally that of the citizenry, will we be a superpower.
–Shyam Agarwal
Sources:
- Imagery:
- The Economic Times
- The Reserve Bank of India
- VoxEU
- Literary:
- The Economic Times
- S.P. Jain Institute of Management and Research