What The Economic Survey Says About Fueling Growth With Borrowed Money

The economic survey makes a distinction – and an important one as it recognizes that debt sustainability and growth are both important, but, debt sustainability depends on growth and not the other way around.

That is, debt sustainability does not lead to economic growth. While there is a case for debt sustainability leading to long-term economic growth for certain high-risk economies, the chapter focuses on India and indeed, managing our debt well is a function of growth and not the other way around.

The importance of this chapter cannot be understated as it comes with the backdrop of a severe reduction in government tax collections on account of the pandemic which has resulted the government to borrow to keep up with its expenditure commitments. The question, that does arise is whether we our debt is sustainable and the answer to it depends on future growth.

For instance, if India borrows money and the interest paid on the borrowed money is lower than the additional revenue mobilized as an outcome of higher growth then this is a win-win situation. Therefore, in such situations, government should borrow and spend rather than worry about debt-sustainability. Or, in other words, what this means is that the government should expand the fiscal deficit.

The economy survey anyway states that there is a case for it taking nearly 2 years for the economy to make up for the lost income. Therefore, we will have to continue to provide an accommodative stance till the economy fully recovers. In such a situation, this renewed thinking is important as it signals a departure from the conventional hawkish stance on the fiscal front which has been criticized by many.

As the budget is due on the 1^st, here’s hoping that the findings of this chapter are duly considered and eventually we do get a more accommodative fiscal stance over the next couple of years as growth indeed is critical to ensure debt-sustainability.