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How India could spend its way out of the Great Recession -Nikita Kwatra and Pramit Bhattacharya

-Livemint.com

The government will have to ensure its spending improves economy-wide productivity, and its own revenue-generating capacity, to avoid a stagflationary trap

After dithering on a fiscal stimulus package for nearly a year, India’s finance minister Nirmala Sitharaman has declared that she will not allow the fiscal deficit number to worry her too much as she pushes spending to revive growth in the upcoming budget.

The government hopes that growth will generate higher tax revenues which will help meet its debt obligations in the coming years. Most economists say that the government does not have any other choice at the moment but caution that the borrowed funds need to be well-spent. Else, the stimulus would be wasted, growth would remain weak, and India could end up in a stagflationary trap. In such a scenario, burgeoning debt would weigh down Asia’s third largest economy amid weak growth and high inflation.

According to estimates prepared by the International Monetary Fund (IMF) in October, India’s public debt-to-GDP ratio has jumped to 89%, and would remain at similar levels till at least 2025, making India one of the most indebted countries among large emerging markets.

Most of India’s sovereign debt is owned domestically. That protects us from the risk of defaults and a full-blown sovereign debt crisis, which several developing economies could face in the coming months and years. Yet, the contagion from a global sovereign debt crisis could roil Indian markets, especially if India’s debt level remains elevated.

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