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

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Inflation, Debt Sustainability, and Government Borrowing in the Time of the Pandemic

Public borrowing is essential to garner resources to combat the current pandemic. The ability to do so and adhere to the standard norms of debt sustainability will be harder for developing economies as compared to the developed, due to constraints, both structural and policy-induced. High food infl ation and the adoption of infl ation targeting will impose severe constraints on the ability to expand borrowing and maintain low levels of debt-to-GDP. In such a situation, governments must either rethink monetary policy and/or allow for debt ratios to rise. 

The author wishes to thank Rohit Thombre for the comments on an earlier draft.

 

Combating the pandemic will require a significant amount of government spending, both for welfare payments currently and for stimulus measure to jump-start economic activity in the future. With the economy facing a recession, and tax revenues declining, the government would have to resort to borrowing for the financing of welfare and stimulus measures. This move would likely add to the stock of public debt, and there would be concerns regarding sustainability. This essay examines certain factors specific to the Indian economy that would have implications for borrowing and debt accumulation during a time of pandemic.

One important factor is inflation, which, through its influence on monetary policy and interest rates, will affect the ability of the government to accumulate debt. However, the impact of inflation will be felt differentially across developed and developing nations. In short, developing nations will find it harder to borrow resources and at the same time adhere to standard notions of debt sustainability due to specific structural and policy constraints. In this situation, it is vital for the government to explore whether to alter the prevailing paradigms of monetary policy management, and/or whether to allow for an accumulation of debt beyond the limits of sustainability.

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Published On : 20th Jan, 2024

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