Economic Survey bats for big expansion of govt spending

The Economic Survey, presented three days ahead of the Budget, strongly argues for a big expansion of government spending, financed by borrowing, ignoring any whiny protests by global rating agencies and worrywarts fretting over crowding out private investment.
This is music to the ears of those despairing of strong government action in the face of an economic slump. The economy had been slowing even before the pandemic: growth was 6.5% in 2018-19 and 4% in 2019-20. The pandemic shrank the economy by 7.7% in 2020-21. Yet, the government’s response was limited to additional spending of 2% of GDP, even as the average global support was 6% of GDP as government spending, on top of another 6% of GDP as fresh liquidity, according to the IMF.

It is not all melody, however. The Economic Survey also calls for an early end to forbearance of credit delinquency, a thoroughgoing asset quality review of our banks and reform of bank governance. Corporate borrowers could come under pressure to service their loans or face bankruptcy; banks will need to raise large dollops of capital, either from the government or from the market.

To spot the V in the V-shaped victory the Survey posits, one has to look at growth computed sequentially, quarter over previous quarter, not over the like-quarter a year ago.

The Survey justifies meagre spending in the first six months of the pandemic as prudent saving of firepower for when a proper supply response is no longer constrained by pandemic restrictions.

Need for an Aggressive Counter-Cyclical Fiscal Policy
It outlines an intellectual framework for state action to break out of the cage of fiscal restraint and pursue an aggressive countercyclical fiscal policy. The Survey makes a strong pitch for expanded borrowing. If the rate of interest is lower than the growth rate, every unit of borrowed capital, when invested, would create more output than is required to service the loan, leaving a surplus. This is the rationale for stepped up government expenditure in a downturn, and the basis for debt sustainability.

To complete the argument for a big push in government expenditure, the Survey debunks the notion that fiscal expansion crowds out private investment, with much empirical evidence. The notion that government borrowing would necessarily displace private investment assumes savings to be finite and static. Investment and growth can generate additional savings, and, in any case, empirical research finds no evidence of government spending depressing private investment.

Low investment has depressed India’s growth in recent years, when fixed capital formation as a proportion of GDP has stayed below 27%, some six percentage points below the level that was routine a decade ago. So, the Survey’s call for expanded government investment and the notion that it could crowd in private investment are most welcome.

The Survey is scathing on global rating agencies, which have systematically and chronically underrated India. It says Indian policy should not be constrained by what rating agencies would do.

The Survey puts to the sword much chatter of growth widening inequality. The succinct message is, don’t hesitate to grow, fearing growth of inequality. For a developing country like India, what really counts is improvement in living conditions at the bottom of the pyramid, and rapid growth alone can erode poverty and that is a worthwhile goal even if it is accompanied by a rise in inequality. The empirical evidence marshalled in support is from a country with which we currently have a staring match along the northern border.

The Survey argues for a big step-up in public expenditure on healthcare, to, say, 2.5% of GDP, a national regulator for healthcare providers, technological utilities to reduce information asymmetry inherent in the system and expansion of telemedicine. It seeks for continuing with the National Health Mission, along with Ayushman Bharat.