ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Post-COVID-19 Paths to Fiscal Consolidation

Using the Snowball Effect

Post-COVID-19 Paths to Fiscal Consolidation

In order to analyse how the excess of growth over the real interest rate can best contribute to Indian post-COVID-19 debt adjustment paths, the article draws on historical experience, past adjustment episodes and special features of emerging markets. It notes that a countercyclical primary deficit will contribute, and together with a substantial g–r gap, lower debt most efficiently, creating space for adequate fiscal response to future shocks.

 

This article analyses post-COVID-19 debt adjustment paths of the union government. In order to understand how the excess of growth over the real interest rate can best be harnessed for this purpose, we draw on historical experience, past adjustment episodes, and special features of emerging markets. Different possible scenarios of adjustment are examined.

The real debt ratio falls if the rate of growth (g) exceeds the real interest rate (r), but rises with the primary deficit ratio (PD). PD is the excess of real government expenditure over taxation as a ratio to output. When r is less than g, public debt ratios can reduce over time even if the PD is positive. The first component is the snowball effect that is getting a lot of attention in advanced economies after COVID-19.

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Updated On : 1st Aug, 2021

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