‘Refine quality of expenditure to aid fiscal sustainability’

Targets must be qualitative too: Das

Maintaining and improving the quality of expenditure would help address the objectives of fiscal sustainability while supporting growth, RBI Governor Shaktikanta Das said on Saturday.

“As per IMF’s calculations, the total fiscal support in response to COVID-19 amounted to about 12% of global GDP by mid-September 2020,” Mr. Das said while delivering the Nani Palkhivala Memorial Lecture online on the subject, ‘Towards a Stable Financial System’. “Global public debt is said to have reached 100% of GDP in 2020. As a result, most economies are expected to emerge from the pandemic with higher deficits and debt vulnerabilities.”

He said although the scale of fiscal spending was expected to breach the quantitative targets of fiscal prudence across most economies in the short-run, it was crucial in the context of the pandemic from the perspective of the welfare aspect of public expenditure.

‘Multiplier effect’

“Expenditure on physical and social infrastructure including human capital, science and technology is not only welfare-enhancing, it also paves the way for higher growth through their higher multiplier effect and enhancement of both capital and labour productivity,” Mr. Das said.

“Going forward, it becomes imperative that fiscal road maps are defined not only in terms of quantitative parameters like fiscal balance to GDP ratio or debt to GDP ratio, but also in terms of measurable parameters relating to quality of expenditure, both for the Centre and States.”

While conventional parameters of fiscal discipline will ensure medium- and long-term sustainability of public finances, measurable parameters of quality of expenditure would ensure that welfarism carries significant productive outcomes and multiplier effects, Mr. Das added.

He also said that the principal objective of the Reserve Bank of India (RBI) during the pandemic was to support economic activity.

“Looking back, it is evident that our policies have helped in easing the severity of the economic impact of the pandemic,” he said.

He reiterated that the RBI “remains steadfast to take any further measures, as may be necessary, while at the same time remaining fully committed to maintaining financial stability.”

Responding to a question, he said the RBI was open to examining any proposal for setting up a bad bank. “It is up to the government and the private sector to put up such a proposal,” the RBI Governor added.

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