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Budgeting in a time of crisis

  • IASbaba
  • January 27, 2021
  • 0
UPSC Articles
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ECONOMY/ GOVERNANCE

Topic:

  • GS-3: Government Budgeting
  • GS-3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment. 

Budgeting in a time of crisis

Context: World over economies are facing crisis in the wake of COVID-19 Pandemic that disrupted the normal functioning of life.

How US is trying to deal with economic crisis?

Today the U.S. is facing its worst economic crisis since the Great Depression. Like Roosevelt, President Joe Biden is launching the American Rescue Plan to revive the economy. 

His $1.9 trillion plan proposes 

  • $1,400 per-person payments
  • Increased unemployment benefits
  • Assistance to local governments
  • Support for accelerated vaccine rollout
  • Investments to get children back in school
  • Minimum wage of $15 an hour.

What are Paul Krugman principles to deal with economic crisis?

  • Noble Laureate Paul Krugman has offered advice against too much of caution in dealing with the economic mess. He has laid down the rules for budget-making. 
  • Enhanced Government Spending: The first rule is to not doubt the power of the government to help. Government spending can be hugely beneficial. The Affordable Care Act, for instance, led to a decline in the number of Americans without health insurance, and gave people a sense of security. 
  • Relaxation of Deficits: The second is to not be obsessed with debt. Economists agree that debt is far less a problem than conventional wisdom asserts. Interest rates are low by historical standards. The burden of servicing debt is low. 
  • Inflation Concerns are overstated: The third rule is to not worry about inflation. Countries can run a ‘hot economy’ with low unemployment and large budget deficits, without runaway inflation. 
  • Consensus on is difficult: The fourth is to not count on bipartisan support. There will be certain opposition with respect to government economy revival plans that can be for narrow purposes. Nevertheless, government should go ahead with providing stimulus to the economy.

The Indian context – What measures can be adopted in upcoming Budget?

  • Challenges w.r.t Fiscal Deficit: India’s GDP is estimated at ₹200 lakh crore. The government was quick to announce a package of ₹20 lakh crore. Fiscal deficit could overshoot the target set by the FRBM Act. Spending more is going to be difficult.
  • Prioritising Health Spending: India has only five beds for 10,000 Indians and ranks 155th on bed availability in the Human Development Report of 2020. Experts opine that the government should increase healthcare spending from 1.5% of the GDP to 2.5%.
  • Increase Spending on Infrastructure as it has multiplier effects: The National Infrastructure Pipeline aims to invest ₹111 lakh crore by 2025 in over 6,800 projects. The proposal to set up a Development Finance Institution is still on the anvil. The Chinese government has entered into building social housing projects.
  • Urban employment guarantee scheme on lines of the Mahatma Gandhi National Rural Employment Guarantee Scheme. This will be far better than direct cash transfers. [ Proposal for DUET: Click here ]
  • Changes in Taxation: Despite historic lows in fuel prices, the government chose to increase fuel prices to record levels. GST has been a big source of revenue. There is a strong case for reducing GST tariff. Cess or surcharge can be levied on the super-rich. The average tariff must come down to 10% from its current level of 14% by 2024, as suggested by Professor Arvind Panagariya.
  • Trade Liberalisation and Privatisation: With several key reforms – new labour codes, new farm laws, single nationwide GST, Insolvency Code, low Corporate Profit Tax – addition of privatisation and trade liberalisation would nearly guarantee a double digit growth.

Conclusion

According to the Centre for Monitoring Indian Economy, unemployment, both rural and urban, is surging, and health and infrastructure budgets are getting stretched. Hence government has to come up with Budget which provides stimulus to the economy.

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