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[video] Fiscal stimulus debate, GDP growth and other factors of economy

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Mains Paper 3: Economy | Indian Economy Issues relating to planning

From UPSC perspective, the following things are important:

Prelims level: Basic terms related to fiscal consolidation like fiscal deficit, etc.

Mains level: The article comprehensively deals with the issue of Fiscal Consolidation, government borrowings and its effects on the Indian Economy. It is an important issue as the government has recently decided to borrow more before the annual budget, Govt. to borrow more; fiscal deficit may widen.


Current issues with the Indian Economy

  1. There is a distinct slowdown in economic growth
  2. Employment creation, already too little, has slowed down even more
  3. The persistent recession and fragile recovery in the world economy, means that external markets cannot provide the demand to stimulate growth
  4. Is anything positive: The good news is that inflation is moderate and world oil prices are still low
  5. Yet, the economy remains vulnerable to shocks such as a jump in oil prices or a bad monsoon


Issue of Fiscal Deficit(in this fiscal year)

  1. There are revenue shortfalls attributable to the complex structure and hasty implementation of the goods and services tax (GST)
  2. There are expenditure overruns
  3. It is possible that the forthcoming budget resorts to an adjustment of revised estimate (revenue and expenditure) so that the fiscal deficit conforms as closely as possible to what was targeted
  4. For avoiding dampening of the GDP further, the government has no choice other than to allow fiscal deficit to exceed the target
  5. Two opposite views on ‘what should be done’


(1) At one end, there are those who want a reduction in the fiscal deficit in conformity with the targets: 3.2% of GDP in FY18 and 3% of GDP in FY19

They have an ideological belief in the virtues of fiscal consolidation

(2) At the other end, there are those who want fiscal expansion to boost growth in the economy through domestic demand in the face of a global slowdown.


What is Fiscal stimulus?


A ‘stimulus’ is an attempt by policymakers to kickstart a sluggish economy through a package of measures. A monetary stimulus will see the central bank expanding money supply or reducing the cost of money (interest rates), to spur consumer spending. A fiscal stimulus entails the Government spending more from its own coffers or slashing tax rates to put more money in the hands of consumers.

Proponents of fiscal stimulus usually cite the legendary John Maynard Keynes to support their arguments. Keynes argued that even small direct interventions by the Government to prop up demand, can have a disproportionately high impact on economic growth due to the multiplier effect.

Argument against Fiscal Stimulus


Historical case: The biggest argument against a fiscal stimulus package comes from India’s own economic history over the past few decades. The most obvious and extreme example is the borrowing spree unleashed by the central government in the late 1980s which culminated in the economic crisis of 1991, forcing a rapid and painful course correction.

Effects investor sentiments: Fiscal stimulus given by Government after 2008 recession increased the fiscal deficit for India, which meant that the Indian rupee was one of the worst hit in the summer of 2013, when foreign investors pulled out funds from emerging markets in anticipation of rising yields in developed markets.

More interest payment obligation: Higher interest payment burden implies less headroom for developmental expenditure by the government. The other disadvantage of a high debt-to-GDP ratio is that it has an impact on the country’s credit ratings and investor sentiments

Will crowd out Private investment: Higher fiscal deficit for an economy means increased government borrowing, which in turn implies higher interest burden. Which will crowds out Private investment.

 Argument for Fiscal stimulus:

Will crowd in Private investment: Currently, the private investment scenario in the economy is languishing. Banks have been investing more than the mandatory requirement in government securities, reflecting the lack of better avenue for banks. Hence a higher government borrowing will not in anyway crowd out private investment. Higher government capital expenditure (capex) is badly required at this point to propel growth.


Government borrowings reliable: Government borrowing is always sustainable if it is used to finance investment and if the rate of return on such investment is greater than the interest rate payable. Hence, there is nothing sacrosanct about keeping the fiscal deficit at 3% of GDP


Negligible Primary deficit: The primary deficit, which is the gross fiscal deficit minus interest payments, reflects whether the fiscal situation is getting better or worse, is estimated at a negligible 0.1% of GDP in 2017-18. These numbers suggest that the fiscal situation is not a cause for concern 




New project announcements by the public sector rose shortly after the Narendra Modi-led government assumed office but the momentum has not been sustained.

But even when new public sector projects went up, they failed to raise the level of overall investments in the economy significantly. The share of investments, or gross fixed capital formation (GFCF), in India’s gross domestic product has in fact been falling over the past few years, from 32.1% in the June 2014 quarter to 29.8% in the June 2017 quarter.

The key reason for this is the pile-up of bad debt that has made lenders wary of lending afresh, and the pipeline of stalled projects that has stymied the flow of fresh investments.

Unless such structural problems are fixed, quick-fix solutions such as a fiscal stimulus package are unlikely to raise growth rates sustainably.

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One comment

  1. very well explained about the GDP growth

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