Post Covid reforms

. Even so, the Covid-19 crisis necessitates a large macroeconomic stimulus. In order not to overstrain government finances it should be targeted, temporary and self-limiting. Financing features can aid this as well as improve financial stability. Large government assets can be monetized to help restructure towards more effective government spending. Specific policy implications are drawn out.

Breif

Why is it that steady high growth continues to elu China’s catch-up growth extended to about 30 years of double digit growth. India’s post-liberalization growth has been volatile and has only rarely reached double digits. A high growth burst in the 2000s was not sustained. There was a slowdown after 2011. Growth was 3% per annum slower than in the previous period. The years 2016, 2018, 2020 saw reversals of weak growth revivals. In 2020 this is due to the Covid-19 shock.

The paper discusses past virtuous growth cycles in India and argues that the post Covid-19 macro-financial package is an opportunity to trigger another such cycle by raising marginal propensities to spend above those to save. This is feasible since the major constraints that aborted such cycles in the past are waning. Among these constraints are commodity price shocks and other supply-side bottlenecks; financial repression and discretionary allocation; and fiscal space. While the first constraint is relieved, and there is adequate progress on the others, fiscal space is still constrained. Even so, the Covid-19 crisis necessitates a large macroeconomic stimulus. In order not to overstrain government finances it should be targeted, temporary and self-limiting. Financing features can aid this as well as improve financial stability. Large government assets can be monetized to help restructure towards more effective government spending. Specific implications for policy are drawn out.