I believe that the Covid epidemic significantly extended the involvement of the government in the economy, and it is crucial to gauge the withdrawal. So, as a government’s fiscal deficit increases, it indicates that it is borrowing money for the future and spending it now. The amount you borrow from the market is the second significant variable. The government’s borrowing was around Rs 4-5 lakh crore before Covid, but it is currently close to Rs 12 lakh crore. After then, tax revenues fell short. So, the market is immediately under pressure as a result. The third issue is that you need to have highly reliable figures. The global economy is incredibly unstable right now. While the Indian private sector and consumer spending are starting to rebound, are still unanswered.
We now get at the fourth element, namely, financial stability. Although we may believe that the economy’s underlying principles drive financial markets, the economy is frequently impacted by financial markets as well. Let’s say there is some scepticism about the budgetary figures, and bond deals increase by 50 basis points. The cost of borrowing for the economy’s general health then spikes and sends the economy into a downward spiral. As we witnessed in the UK, if the economy weakens, the government’s tax revenue also begins to decline, which can do significant harm.
The government’s continued emphasis on capital spending is crucial since government spending and the magnitude of the fiscal imbalance determine short- ormedium-term expansion. People start spending if you increase funding for programmes like PM KISAN, increase the minimum wage, or introduce a cash transfer programme that puts an extra Rs 100 in each recipient’s pocket. Aggregate demand results from this. If you decide to use that Rs 100 to build a road, it can also result in higher inflation. It increases the demand for steel, generates employment, and eventually drives down logistical costs, improving India’s competitiveness and fostering medium-term growth. Time will tell whether the government is able to reach these capital spending targets, whether the states are able to ramp up or not, or whether the Rs 1.3 lakh crore has been given to them for conducting capex.
