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Fiscal Situation of India in the Time of Covid-19
India announced a fiscal package worth `1.7 trillion to fight the COVID-19 pandemic, but there were arguments for more spending. Using data from a cross-section of countries, this paper estimates the relationship between fiscal spending and the spread of COVID-19, economic stringency, and macroeconomic factors. It argues that subsidy rationalisation is the way to fund the increased expenditure on health and direct transfers while maintaining fiscal discipline.
The authors would like to thank Viral Acharya, Chetan Ghate, and Ashok Gulati for their valuable comments and feedback. The views and opinions expressed in this paper are those of the authors and do not necessarily represent the views of the Centre for Advanced Financial Research and Learning (CAFRAL) or other affiliated institutions.
The global economy came to a near standstill because of the COVID-19 pandemic. The economic shutdowns, implemented around the world, were unprecedented and entailed large economic costs.1 In this scenario, fiscal policy could provide temporary relief to those most affected by the shutdown. With the widespread disruption in economic activity, carefully designed government expenditure could help ease the pain as well as nourish the economy back to its full potential. However, the policy action has to be guided by the available fiscal space; it cannot operate in a vacuum. In this context, this paper looks at the current fiscal situation in India and how it will be affected by the pandemic.
India’s fiscal spending can be described as fiscal populism (Alesina et al 1997; Bender and Drazen 2005; Nandy et al 2020). The government undertakes spending on social security through cash transfers or food programmes, boosting employment, maintaining airlines, and engaging in many other activities. The cumulative result of all this expenditure is a high fiscal deficit. Many studies (Acharya 2016) have pointed out that the fiscal situation in India over the last few decades has been one of profligacy when compared to similar economies around the world. In the last two years, the combined deficit of the centre and state governments has been around 6.5%.
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