India says no to austerity to help the economy emerge from Covid-19 slump – Quartz India

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The Narendra Modi government, which has kept a hawk eye on spending for the past seven years, said the budget deficit for 2020-21 will stand at 9.5%. It would be the highest at least since India liberalized its economy in 1991.

For context, the budget deficit for 2019-2020 was 4.6% of India’s gross domestic product (GDP).

At first glance, a high budget deficit – the difference between government revenue and expenditure – is alarming. It increases government borrowing and sends it into an interest repayment cycle, which only increases spending further in the future.

In the past, governments have chosen the route of austerity to bring the budget deficit under control. It has been a common economic strategy, its greatest champions being former US President Ronald Reagan and former UK Prime Minister Margaret Thatcher in the 1980s.

Austerity is a measure by which governments reduce their spending to close the budget gap. Given the extenuating circumstances of the Covid-19 pandemic and its devastating blow to the Indian economy, experts feared that the increasing budget deficit could lead the government down a path of austerity.

But the budget announcements on investment spending and the failure to set a very low public deficit target for the coming year are a respite for economists worried about austerity measures.

The fear against austerity comes from global examples of its failure to lift economies out of deep distress.

Austerity: a failed economic model

Thatcher was one of the strongest advocates of cutting government spending. In 1979, she cut UK government spending by 10%, creating a policy that called for a fall in the budget deficit (pdf) from 7-8% of GDP in 1980-81 to 4-8% in 1984.

Austerity was a popular conservative economic prospect, also widely supported and used as a measure by the International Monetary Fund (IMF) to monitor economies. He formalized this perspective with the Maastricht Treaty of 1992, which stipulated that the countries of the European Union should not have a budget deficit greater than 3% and public borrowing greater than 60% of GDP.

The 3% budget deficit target is also codified in India’s 2003 Fiscal Responsibility and Fiscal Management Act., to which the Indian government now hopes to return after 2026.

But as with Thatcherism and the years of recession in the UK that followed, austerity has proven largely ineffective in helping struggling economies get back on their feet. When the Greek economy bailed out in 2008, austerity measures proved catastrophic for the country’s inequalities and its ability to lift itself out of the debt burden. It is a story that also unfolded during the Italian economic crisis of 2010.

The IMF also reversed its tough stance on a country’s debt-to-borrowing ratios and budget deficit while granting loans in 2016. But it has often been criticized for adding austerity clauses to lending to countries in need. low income. For example, the Ecuadorian government had to announce an austerity plan for an IMF-backed loan in 2019. It then withdrew that plan after facing massive civil unrest.

These failures in the austerity measures are mainly why US President Joe Biden and US Treasury Secretary Janet Yellen have pushed for a massive government stimulus package to the tune of $ 1.9 trillion. Yellen, in January, defended the decision in the US Senate. While acknowledging the country’s growing debt burden, she said: “… Right now, with interest rates at historically low levels, the smartest thing we can do is act big. In the long run, I think the benefits will far outweigh the costs, especially if we care about helping people who have struggled for a very long time, ”according to the Washington Post.

This also appears to be the motivation behind Indian Finance Minister Nirmala Sitharaman’s stance on increasing government spending.

Will India stay on the path of austerity?

India’s borrowing has reached nearly 84% of GDP as estimated in the current 2021 budget. It has also set a budget deficit target of 6.8% for 2021-2022.

If it were to maintain spending, the government would have to borrow more and increase tax revenues. Divestment is also a major projected revenue stream, and the Modi government hopes to increase Rs 1.75 lakh ($ 24.02 billion) by March 2022. But if the government is to stick to its estimates spending, economists say it should also seek to collect more tax.

Such tax collection would only be possible with a boost to job creation, which economists fear the government will not address. “There was no clear statement in the budget on boosting employment, especially the employment of women, which has declined in recent years,” said Ashwini Deshpande, professor of economics and founding director of the Center for Economic Data and Analysis at Ashoka University, writes in The Indian Express. “Infrastructure spending (which, unsurprisingly, was targeted at linked states by polls) could boost employment to some extent, but it’s not clear that the spending increase is enough to raise the massive job challenge, ”she added.

Curiously, the Indian government announced austerity measures in June 2020, choosing to suspend spending on social protection schemes other than those of the Atma Nirbhar Bharat (Autonomous India) program for Covid-19 aid announced in March. . Also in the past, the government of Prime Minister Narendra Modi has cut spending on fiscal consolidation. For example, it reduced unplanned public spending by 10% in 2014.

The Covid-19 economic package has also been criticized for focusing on providing more liquidity to businesses and individuals rather than offering a real stimulus. In fact, between April and September 2020, government spending was lower than in the same period a year ago, Mahesh Vyas, managing director and CEO of think tank Center for Monitoring India, wrote in The Economic newspaper. Times.

The true nature and extent of public spending and its incentive to the economy will only be clear once the economic survey is published in January 2022. And it is only then that the attitude of the Modi government to with regard to austerity will really emerge.

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