GS Paper 2 : Infrastructure
Qn. “Fiscal stimulus is accompanied with bad ratings by credit rating agencies”- Examine the statement and explain the stimulus that the Union Government can come up with so as to kick start the economy to higher levels of growth ? (250 words)
Why this Question ?
The question has been asked in the backdrop of the slump in economy as a result of the lockdown imposed to contain the spread of COVID-19 in India. As a result of the lockdown several sectors and industries have come to a halt and thus the GDP for the previous quarter had come down to historic lows. In order to revive the economy the Govt of India had come up with stimulus package that included additional spending on the part of the government and various monetary relief in the form of postponement of interest payments.
There are two parts to the question.
The first part brings out the consequences of a fiscal stimulus in reducing the credit worthiness of the government.
The second part expects us to point out if any additional measures can be adopted by the government so as to increase the public expenditure so as to revive the economy.
The introduction can first define what “Fiscal Stimulus” actually means.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.
It should be pointed in the introduction itself that fiscal stimulus has its own set of problems that accompany such a move by the Government. The problem should be explained clearly in the content part of the answer.
A government devoid of additional resources has to resort to borrowing in order to spend the additional requirement. By borrowing, the Government in all probabilities breaches the FRBM targets and the revenue expenditure increases. As a result the bulk of the earnings of the government goes into servicing the debt and interest payments thus leaving less fiscal headroom for productive (capital) expenditure.
These actions end up reducing the credit worthiness of the government in the eyes of the rating agencies thus reducing the FDI inflows and the ability of the government to mobilize future loans.
Answering the second part of the question:
Fiscal stimulus measures by the Government in the future.
1.Increasing cash transfers through JAM trinity. (PMGKY – Rozgar)
2.Clearing the pending bills and expediting the refunds.
3.Fast tracking disinvestment of the PSU’s
4.Push all the delayed infrastructre projects in the pipeline
5.Reducing the rate of GST for cement,steel from the present 28% to lower rates.(revive the construction sector – large employment generator)
Each point needs to be elaborated so as to clearly explain the importance and the extent to which these measures can provide the necessary stimulus to the economy.
The conclusion should be written in such a way that it touches upon both parts of the question. It should mention that “Fiscal stimulus undoubtedly is important at this crucial juncture when the economy is under a slowdown, however it would be the responsibility of the government to prioritize the expenditures so that all wasteful expenditures can be temporarily curtailed so as to have sufficient headroom for economy stimulating expenditures”.This would also ensure that the FRBM limits are breached by a minimum thus not creating adverse rating by the credit rating agencies.