Government expenditure to fight coronavirus should be spread over this fiscal and the next otherwise the the deficit calculations will go haywire, the National Council for Applied Economic Research (NCAER) has warned.
The council, which is one of the country’s top think-tanks, has recommended a calibrated approach to finance the additional public expenditure for Covid-19 to maintain macro-economic stability.
The Delhi-based NCAER said the Rs 20-trillion package, which represents 10 per cent of GDP, contains an additional headroom of nearly Rs 12-trillion stimulus expenditure and can be supplemented with the liquidity measures of the Reserve Bank of India.
The institute has estimated that by increasing public expenditure by 5 per cent of GDP, the economy will grow 3.6 per cent, but so will inflation to 10.1 per cent, fiscal deficit to 9.4 per cent of GDP and current account deficit to 3.6 per cent of GDP.
The fiscal and current account deficit could shoot higher if a 6 per cent additional expenditure is fully implemented in the ongoing fiscal.
“In the interest of restoring macro-economic stability, it is recommended that the Rs 20-trillion package be spread over 2020-21 and 2021-22,” the institute said in its quarterly review of the economy.
It added that given the large scale of lending required to finance the massive, unprecedented borrowing programme, multiple channels of financing need to be taken into consideration.
The first option is for both central and state governments to borrow from commercial banks.
Another option is for the RBI to relax the duration limit of Ways and Means advances from 90 days to one year to accommodate the emerging borrowing needs of the state governments.