Using the snowball effect in Indian post Covid-19 paths to fiscal consolidation

Ashima Goyal

Indira Gandhi Institute of Development Research, Mumbai Working Papers from Indira Gandhi Institute of Development Research, Mumbai, India

Abstract: In order to analyze how the excess of growth over the real interest rate can best contribute to Indian post Covid19 debt adjustment paths, we draw on historical experience, past adjustment episodes and special features of emerging markets (EMs). In many EMs growth (g) routinely exceeds real interest rates (r) because of good growth prospects. But borrowing costs are high and unstable. Volatility and uncertainty can raise risk premiums and interest rates. Both domestic and international risks have to be reduced to lower volatility. With regard to domestic policy, India does show a credible fall in primary deficit ratio (PD) as well as off budget items after fiscal responsibility legislation was introduced. The g-r gap was also positive but pro-cyclical macroeconomic policy made this highly variable. Counter-cyclical policy that stabilizes shocks can keep average g-r at around 5. A counter-cyclical PD will contribute, and together with a substantial g-r gap, lower debt most efficiently, creating space for adequate fiscal response to future shocks. Reducing debt in the medium-term is consistent with Covid19 related fiscal spending.

Keywords: Deficits; Debt; Adjustment paths; Covid19; Emerging markets (search for similar items in EconPapers)
JEL-codes: E62 E63 H63 O11 (search for similar items in EconPapers)
Pages: 17 pages
Date: 2021-06
New Economics Papers: this item is included in nep-fdg, nep-isf and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:ind:igiwpp:2021-016

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