The Indian Economy: Making a Case for the Government to Play its Economic Role

Indian Economy Making a Case for the Government to Plays its Economic Role

On 14th February 2020, the International Monetary Fund (IMF) advised India that it needs further reforms and fiscal consolidation measures owing to its increasing rising debt levels. [1] It is not the first time that India and many other developing nations have received such advice. It will also not be the last time, as IMF’s advice is based on its faith in an open, market-based system where the ‘government failures’ dominate ‘market failures’.

At the same time, S&P Global Ratings, while affirming the long-term sovereign rating at BBB-, flagged off rising fiscal deficit and increasing government debt as its twin concerns. The Economic Survey (2018-19 and 2019-20) also seems to be worried about fiscal deficit and argues for fiscal consolidation. The Survey’s recommendations for policy makers also seen to grounded in the same orthodoxy that IMF and S&P based their recommendations on.

Based on our analysis, presented in Indian Economy Making A Case for the Government to Play its Economic Role, we argue that it is the context that must guide policy choices rather than economic orthodoxy, as we don’t have conclusive evidence on any of the problems (deficit-inflation, crowding out of private investment, effectiveness of night-watchman role of the state, etc.) that the economic orthodoxy expects us to believe. And, India’s context is that of a young, low-middle income, agriculture-dependent economy with limited risk capital with households and private enterprises.

In this scenario, we see the state to be playing an active role, a role that helps an average Indian deal with economic uncertainty and be able build risk-capital over time, which requires government investment in economic and social infrastructure and creation of employment in the government sector.

We are not arguing that the private sector has no or limited role. Our argument is that the Indian private sector (households as well as corporations) have limited risk capital, which limits their ability and willingness to take risk and deal with economic uncertainty. It is, therefore, imperative that the Indian state uses its status of risk-free borrower to invest and help people build the ability to take risk.

Given that the global and the Indian economy is faced with even greater uncertainty from Novel Corona Virus (NCV) pandemic, it is all the more imperative for the Indian government to invest for growth, support consumption for the poor and middle income families and support small and medium businesses.


[1] https://www.financialexpress.com/economy/imf-to-nirmala-sitharaman-india-needs-these-reforms-urgently-economy-weaker-than-projected-earlier/1867790/

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