Public Finance in Pandemic Times

Abstract

Never before in living memory has economic destruction been so severe as it has been caused by the COVID-19 pandemic. The pandemic has struck at a time when the economy has already been slowing due to structural problems. Therefore, hastening the recovery process and accelerating the pace of economic growth requires the government not only to provide substantial stimulus but also to implement structural reforms. The stimulus provided so far has been mainly by the RBI on the supply side in terms of reducing interest rate, augmenting augment liquidity, restructuring loans to stressed sectors, moratorium on repayment of loans to severely impacted businesses and regulatory forbearance. The fiscal stimulus on the demand side has not been significant and amounted to just about 1.5 percent to 2 percent of GDP. The sharp contraction of the economy by 15.7 percent in the first half has substantially eroded revenue collections requiring both central and state governments to sharply reduce both government consumption and investment expenditures. Faster recovery in the second half of the year will crucially depend upon heavy lifting by the governments which requires them to increase consumption expenditures, transfers as well as capital expenditure by scaling up borrowing as well as monetizing the assets. The aggregate fiscal deficit as well as outstanding debt are likely to show a sharp increase which will raise questions of sustainability. The government has initiated a number of reforms, particularly to infuse flexibility to land and labour markets, reform regulatory systems in education and healthcare, and has made additional borrowing to the states conditional on undertaking power sector reforms, property tax reforms and improving the ease of doing business. However, implementation of these reforms holds the key. There is a need to urgently address problems of the financial sector. Reforms in sectors such as police and judiciary too are overdue to protect the life and property of people and enforce contracts.