Economic Survey has called for an increase in government spending to bring back economy on growth path after the COVID-19 impact. The survey released on Friday gave examples of ancient ways of handling economic crises. "Indian Kings used to build palaces during famines and droughts to provide employment and improve the economic fortunes of the private sector. Economic theory, in effect, makes the same recommendation: in a recessionary year, government must spend more than during expansionary times. Such counter-cyclical fiscal policy stabilises the business cycle by being contractionary (reduce spending/increase taxes) in good times and expansionary (increase spending/reduce taxes) in bad times. On the other hand, a pro-cyclical fiscal policy is the one wherein fiscal policy reinforces the business cycle by being expansionary during good times and contractionary during recessions," it said.
The survey stated that with coronavirus deeply impacting economies, the debate has moved to higher government debt to support fiscal expansion and its impact on future growth, debt sustainability, sovereign ratings, and possible vulnerabilities on the external sector. "While fiscal policy is especially salient during an economic crisis, in general, fiscal policy must be counter-cyclical to smooth out economic cycles instead of exacerbating them," stated the Economic Survey.
Counter-cyclical fiscal policy is necessary to smooth out economic cycles but is critical during an economic crisis, it stated. The survey said this is because the aggregate return derived from an additional rupee of fiscal spending is greater during economic crises.
"In a country like India, which has a large workforce employed in the informal sector, counter-cyclical fiscal policy becomes even more paramount. In advanced economies, where the public and private sector labour markets are not too segmented, fiscal spending can increase public sector employment, reduce the supply of labour in the private sector, bid up wages, and thereby crowd out private sector employment. However, in a country like India, where the private and public sector labour markets are largely segmented, such crowding out of private sector employment is minimal. Thus, debt-financed public expenditure is more cost-effective to employ during recessions than during economic booms," stated the survey.