So long as growth triggered by government borrowing is higher than the interest rate, things are just fine.
After having dipped 24.4% in the first quarter of 2020-21, GDP in the first quarter of the current fiscal has grown just 20.1%. As compared to the Q1 GDP of the pre-pandemic 2019-20, the first quarter output this year is 9.4% smaller. This is the handiwork of the second wave of the pandemic that hobbled economic activity in many parts of the country, apart from taking a terrible toll of life. This makes it tougher for GDP growth in the remaining three quarters of the financial year to be sufficiently robust for the economy to have reached its size before the pandemic struck. There is plenty of scope for fiscal action to boost investment and growth.
Gross fixed capital formation as a proportion of GDP has recovered to the pre-pandemic level of 27%, which is anaemic compared to the investment rate required for the economy to grow at anything close to double digits. Even the 27% achieved in Q1 this year has to be the result of government investment. There is little scope for the government to slacken its own pace of investment. Government consumption expenditure had risen heroically to more than 17.7% in the first quarter of 2020-21, but it has slumped back to 13.7% in Q1 this year. Slackening consumption expenditure by the State would not matter much, if it were to step up capital formation out of budgetary funds. It is not necessary for the government to wait to mobilise resources from asset monetisation and the like. Even as work proceeds on this front, the government should borrow and spend, to raise investment in the economy. That would generate orders for all kinds of businesses, and raise the overall momentum of growth.
Inflation had spurted in the recent past, essentially on account of supply bottlenecks and the increase in the price of petro-fuels. The economy does not suffer from excess demand. This reduces the risk of a large fiscal deficit causing inflation or widening the current account deficit. So long as growth triggered by government borrowing is higher than the interest rate, things are just fine.