Fiscal Rectitude Can Mean Larger Deficit–economic times

Clipped from: https://economictimes.indiatimes.com/blogs/et-editorials/fiscal-rectitude-can-mean-larger-deficit/

The Reserve Bank of India governor Shaktikanta Das is right to seek a roadmap to fiscal prudence. Persistent high fiscal deficits can cause macroeconomic stress, manifesting as inflation and a widening current account deficit. However, fiscal rectitude does not always mean a smaller deficit. In a situation such as the present one, the right policy is to have a significantly larger deficit, so as to give a major push to economic growth and elevate it to a high trajectory.

India’s direct fiscal stimulus, at less than 2% of GDP, has been underwhelming. Of course, increasing the size of the stimulus would mean a higher fiscal deficit, given the sharp slide in revenue collections. This, in turn, would push up the public debt-to-GDP ratio in the near term, but also accelerate the rate of economic growth. Whereas a low increase in the fiscal deficit (due to a smaller stimulus) would nudge up debt/GDP only by a bit, it would effect only moderate force to the economic impulse. So, it makes sense to have a larger and swifter stimulus than a smaller one.

A higher growth trajectory would lead to falling debt/GDP over the years, whereas low growth would lead to rising debt/ GDP. Of course, all the additional investment needed to boost growth need not come from the exchequer. A lot of investment can be catalysed by the government through policy and guarantees that result only in the addition of contingent liabilities.

Offering an acceptable rate of return will boost the flow of global capital, helping the completion of projects such as the Delhi-Mumbai Industrial Corridor. To support fiscal consolidation, the government needs to improve its tax analytics and collections. States must also rigorously collect user charges and avoid taking on subsidy burdens.

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