New Delhi: Indian kings used to build palaces during famines and droughts to provide employment and improve the economic fortunes of the private sector, the Economic Survey noted.
It gave this instance to say that economic theory, in effect, makes the same recommendation.
“Indian Kings used to build palaces during famines and droughts to provide employment and improve the economic fortunes of the private sector,” it said to show the relevance of the counter cyclical policy.
“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,” the Survey said.
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.
For India, in the current scenario, when private consumption, which contributes to 54 per cent of GDP is contracting, and investment, which contributes to around 29 per cent is uncertain, the relevance of counter-cyclical fiscal policies is paramount, the Survey noted.
Quoting economist Paul Krugman, the Survey said that a sustained, productive programme of permanent stimulus directed towards public investment, in both physical and human capital, is the need of the hour.
As the Covid-19 pandemic has created a significant negative shock to demand, active fiscal policy – one that recognises that fiscal multipliers are disproportionately higher during conomic crises than during economic booms – can ensure that the full benefit of seminal economic reforms is reaped by limiting potential damage to productive capacity, it said.
In fact, simulations undertaken till 2030 highlight that given India’s growth potential, debt sustainability is unlikely to be a problem even in the worst scenarios. The survey has demonstrated the desirability of using counter-cyclical fiscal policy to enable growth during economic downturns.
“While acknowledging the counterargument from critics that governments may have a natural proclivity to spend, the Survey endeavours to provide the intellectual anchor for the government to be more relaxed about debt and fiscal spending during a growth slowdown or an economic crisis,” it said.
“The Survey’s call for more active, counter-cyclical fiscal policy is not a call for fiscal irresponsibility. It is a call to break the intellectual anchoring that has created an asymmetric bias against fiscal policy,” it added.