Fiscal Expansion Response

What are the Components of fiscal expansion?

  • The non-discretionary automatic stabilizers: Automatic stabilizers are ongoing government policies that automatically adjust tax rates and transfer payments in a manner that is intended to stabilize incomes, consumption, and business spending over the business cycle.
  • The discretionary fiscal impulse: Actions taken in response to changes in the economy. These acts do not follow a strict set of rules, rather, they use subjective judgment to treat each situation in unique manner. Examples may include passing a new spending bill that promotes a certain cause, such as green technology.

How was India’s fiscal policy response to revive economic contraction?

  • Discretionary fiscal impulse in India has been only a modest 1.8% of GDP.
  • Most of the fiscal expansion this year is likely to come from a decline in tax collections and other types of automatic stabilizers, rather than government action.
  • In comparison, almost 60% of the fiscal expansion in emerging markets has come from discretionary policy
  • India’s fiscal response has been more of “below the line” measures through credit guarantees, payroll support, equity infusion and special liquidity schemes.
  • “Below the line” fiscal support amounts to 5.2% of GDP. In this, India resembles advanced economies rather than its emerging markets peers.

Why India has emphasised to spend low on discretionary spending?

  • During the crisis India’s Fiscal strength was far less than other major economies.
  • Fear of sovereign credit-rating downgrade, in case the fiscal situation deteriorates further.
  • Prevalence of high inflation, which means that a demand stimulus during a severe supply shock would have added to price pressures.
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