What provoked Thomas Carlyle to label economics as a “dismal science” is still a mystery, but the name stuck. Perhaps one of the reasons may be the uncertainty of its predictions and the fact that opposing points of view are acceptable in this “science”. Take the fiscal deficit issue for instance. At least Economists agree on its definition. It is the difference between the governments’ total expenditure on all heads and the total income from all sources. If Income is less than expenditure then there is a deficit called a fiscal deficit, which the Government meets by borrowings.
There is no clear consensus of how much a Government should be allowed to borrow. All borrowings need to be repaid and serviced through an interest in the interim. The burden falls on succeeding generations and hence the issue. In our country an Act has set a limit of 3% of the GDP. It is going to be a while before we achieve this target. We are currently way above this figure.
There is no doubt that COVID requires the Government to revive the economy through measures that will ensure that money (or in-kind) starts filling up people’s pockets. Some actions have already been initiated, like transferring Rs 1000 into every Jan Dhan account, or the supply of free wheat/rice/dal. There is a fair amount of publicity of a Rs 20.9Trillion package, by the Centre in this regard. Unfortunately, a very large component of that package is not resources, (either money or kind) transferred to people in need, but guarantees to Banks and other Lending Institutions to help them lend. The moot question is whether all the businessmen (small or big) are waiting for money to restart their business, or whether the need is to have people start buying their products? If the latter, then the focus should be on putting money in the hands of potential customers. That money should be borrowed by the Government (from RBI or elsewhere) and that is the true deficit. A statement was made that the Governments Rs 20.9 Trillion packages is actually a deficit equivalent to 10% of the GDP- against the norm of 3%. If that was so, it is good. But the analysis by experts (and reported in prominent economic dailies) is that the percentage is just around 1% of GDP. If it were true, then this compares very poorly with similar deficits in other countries which are between 7% and 10% of GDP. Clearly, the Government has not been bold and the dismal science scores again.
A metric often used by Economists and Planners is the quantum of interest paid by the Government (on its borrowings) as a percentage of the GDP. Graph 1 indicates that our percentage is in line with some developed economies. However, our interest rates are twice that of developed economies. We may not be as close to Brazil, but even halfway may be worth risking. Our Government has been far too cautious.
Talking of surplus money, the jump in fixed deposits into the Banking system by ordinary folks like us at Rs 2.9 Trillion in one month (Graph 2) is nearly 4 times the normal growth. People are saving money big time, taking money out of savings accounts. They are clearly expecting very difficult times ahead.