A wider deficit is unavoidable to
strengthen demand (Mint)
- The dominant consensus on the slowdown in India is that we have a demand
problem. Lack of aggregate demand is a phrase that goes back to John Maynard
- He is a ghost who reappears from time to time, however much one tries to
bury him. Regardless of whether you are a Keynes devotee or not, his logic
is irresistible, both to the policymaker and the common man, or woman.
- If there is insufficient demand on account of inadequate consumption,
investment or exports, it ought to be offset by the government stepping in.
- That is to say a fiscal push is inevitable.
- Only once the government creates demand for goods and services through
extra deficit-spending will new jobs and incomes be generated, which in turn
will create fresh demand for goods and services, setting off a virtuous
cycle until the economy can run on its own steam without fiscal steroids.
- The idea of deficit-spending divides economists into anti-deficit
fundamentalists and “deficits do not matter" shoulder-shruggers who tend to
support any amount of fiscal profligacy.
- Most well-meaning, classically-trained economists fall in the former
camp, and they see opposing deficits as a noble duty because nobody else
champions the moral cause of austerity or balanced budgets.
- The libertarians among them oppose deficits also because they don’t
trust the government. Conventional theory says that uncontrolled
deficit-spending will lead to high debt and interest rates, inflation and
ultimately a crisis that will call for debt repudiation.
- That will lead to a loss of investor confidence and growth.
- This is the doomsday scenario. But India’s experience of the past three
decades has been that despite a relatively high deficit, its economy has
grown at a fast pace without runaway inflation, let alone debt repudiation.
For a developing country, deficit-spending makes sense
- This is because the growth benefits of that spending accrue over
multiple generations, so that today’s benefits are paid by taxes on
tomorrow’s unborn citizens. This is sensible both from efficiency and
fairness points of view.
- If a bridge or airport is financed through a deficit today, it is a
public good that will last for more than 50 years and whose benefits will be
enjoyed by multiple generations. So long as the country’s demography is such
that more beneficiaries are expected to be born than there are today, the
per capita burden of today’s deficit-spending will be lower tomorrow.
- India currently enjoys such a demographic profile. Of course, there is
such a thing as sustainable debt. Whether it is 100% or 200% of gross
domestic product (GDP), one cannot say.
- The Fiscal Responsibility and Budget Management expert committee has
recommended that central debt be capped at 40% of GDP.
Country with highest debt-to-GDP ratio
- Japan has the world’s highest debt-to-GDP ratio, at close to 350%. But
its debt is still AAA-rated and nobody has said it is unsustainable, even
though its demography is unfavourable because its population is shrinking.
- The per capita burden of servicing that debt will keep rising for future
Japanese generations. One big point in their favour is that most of the debt
is held internally. It is like the left pocket owing money to the right.
- Another favourable point is its near-zero interest rate on sovereign
debt. It is as if servicing the debt is almost without cost.
- In the US, which runs the highest deficit in the world (close to $1
trillion), the big point is that all its debt is in a currency that it can
print. So it can earn unlimited seigniorage, inflate and thus erode the real
value of its debt.
- Moreover, the world seems to have an insatiable hunger for US sovereign
bonds, so financing the debt seems like a cakewalk.
- Indeed, long-term yields on US bonds is very low, which has led to an
inverted yield curve.
Macroeconomic situation in India
- India’s macroeconomic situation warrants a significant fiscal push.
China just announced a $125 billion spending plan, which is five times the
cash surplus transferred by the Reserve Bank of India to the Centre.
- It is experiencing the adverse effects of a trade war with the US, as
well as a slowing domestic economy. But the size of its fiscal injection
shows what it takes to make an impact. Of course, the quality and
destination of the fiscal spending greatly matter.
- Development of infrastructure, both hard and soft, should be a top
priority. But let us not forget that old Keynesian idea of the efficacy of
even filling ditches.
- The National Rural Employment Guarantee Scheme can serve the dual
purpose of creating rural jobs and village assets.
- The scheme accounts for less than 2% of all person-days annually, but
sets a wage floor and raises rural earnings overall. It is particularly
relevant and imperative in light of India’s rural distress.
- While we loosen our fiscal purse strings, we should not lose focus on
the revival of export growth, manufacturing, skill-building and agricultural
- The extra fiscal bill can be partly funded by the ambitious sale of
government stakes in public sector entities. But running a bigger deficit in
these times is a must.
- Thankfully, India is enjoying a demographic dividend that gives it
greater leeway for deficit-financing.
Q.1) With reference to the Airports Economic Regulatory Authority of India
(Amendment) Bill, 2019, consider the following statements:
1. It amends the definition of “major airport” as any airport which has
annual passenger traffic of over 35 lakhs instead of existing 15 lakh.
2. Airports Economic Regulatory Authority of India (AERA) would determine tariff
structures in the case of privatised airports.
Which of the statements given above is/are correct?
A. 1 only
B. 2 only
Q.1) What do you mean by Deficit-spending? How India could maintain demographic
dividend that gives it greater leeway for deficit-financing?