COVID-19: India needs large fiscal stimulus, says Basu

PTI, May 10, 2020, 3:32 PM IST

New Delhi: India needs a large fiscal stimulus as the country faces the big risk of a slowdown in the economic growth due to COVID-19, former chief economist of World Bank Kaushik Basu said on Sunday.

He also suggested that the government may need monetization by the Reserve Bank of India.

In an interview with PTI, Basu said inequality in India is already very high and coronavirus pandemic will make it rise further.

“There are dark clouds over every economy in the world, and India is no exception,” he added.

“We do need a large fiscal stimulus. India has the FRBM Act, 2003, for fiscal management and to make sure that the government does not overspend. But the FRBM is a sophisticated piece of legislation that recognizes that, during times of natural calamity, we should be allowed to run up the larger deficit,” Basu said.

Moody’s Investors Service on Friday said it has estimated India’s GDP growth to hit ‘zero’ in FY21 and pointed to a wide fiscal deficit, high government debt, weak social and physical infrastructure, and a fragile financial sector.

The Centre must give states the freedom to spend more, respecting India’s federal structure, Basu said, adding that if this continues for too long, it can unleash inflation, so this will have to be a short-period intervention.

Replying to a question on the need for monetization, which is loosely referred to the printing of currency by the Reserve Bank, he said, “We may need monetization by RBI but I would recommend using that very sparingly”.

“Inequality in India is already very high and so this is worrying. My fear is that the coronavirus pandemic will cause inequality to rise. I am in favor of wealth being taxed and inheritance being taxed. No one should be born into extreme poverty and that cannot be corrected without a wealth tax and inheritance tax,” he stressed.

Basu, currently a professor of economics at Cornell University, noted that amid risks during this crisis, the governments should begin to control and micro-manage the economy and society.

“We need a team of talented bureaucrats and even professionals from outside government to take charge of designing the trade-off between the pandemic and the looming economic crisis. Over-policed economies are a recipe for disaster. From the movement of global capital and the rupee depreciation, it is clear that global players are worried about this,” he said.

On India’s strategy to exit from the lockdown, he said several countries in Europe and East Asia have started easing restrictions, and one can see the benefits they are getting from exchange rates and capital flow data.

“It is not easy exiting from the lockdown but if India is determined, India can do it,” Basu said.

Elaborating further, he pointed out that when it comes to COVID-19 deaths, India’s numbers are lower than in all European nations.

“Germany is one of the world’s best-managed nations but the risk of COVID-19 death in Germany is 80 times greater compared to India. We must not make the mistake of locking ourselves down in the fear psychosis. This can cause an economic setback for many years to come,” he observed.

India is under nation-wide lockdown till May 17. Prime Minister Narendra Modi had first announced a 21-day nationwide lockdown from March 25, which was later extended by two more weeks, to contain the virus spread.

Several experts have cautioned that the lockdown is severely impacting the economy, and many rating agencies and industry bodies have forecast a sharp dip in the country’s economic growth rate for the current fiscal.