Economic recovery

This is a good article by Rajesh Kumar in business standard dated July 31, 2020. He speaks of three issues that would need to be addressed to ensure sustained economic recovery.

 

The first is the poor state of government finances. Budget deficits of all Governments will increase more than a normal progression would allow for. The poor state of the economy as the result of the covid pandemic shows no fixed progression making assessments less reliable. The State bank of India has released a note which showed that public debt increased from 67.4% of GDP in 20 1112 to 72.2% in 2000 1920.

 

The projected debt of governments is only part of the story and all governments have taken to the practice of shifting liabilities to the books of state owned enterprises, some with government guarantee and some without government guarantee. In all such cases PSUs borrow money for a specific purpose and governments take over the amount to use for other purposes, clearly a diversion of funds with an intention to make books look better.

 

In the current year over 43% of the union government’s budgeted net tax collection was set aside for interest payments. This is only a debt trap which governments are getting into, with fresh borrowing going to service old debt. In some states the annual borrowings just about equal the debt servicing obligations and in worse managed states the annual borrowings are not enough to meet debt obligations. Governments are therefore forced to cut back developmental and welfare expenditure.

 

The second weakness pointed out is the fragility of the financial system with increase in non-performing assets in the banking system is already affecting their ability to lend and also affecting their willingness to lend. Bankers seem to be getting into the trap of wanting to lend only to governments as such action would prevent civil and criminal action against them. The banking regulator is just not able to provide the leadership or the oversight required to keep banks running on sound lines.

 

They need to improve ease of doing business further cannot be understated. Even though governments have taken conscious efforts, the spirit has not percolated to the last mile functionaries. In a large system, this would take more time and needs continued attention by governments over extended periods of time.