In the short-term, much focus is correctly on getting the Indian economy, felled by woes in the financial sector and virus, to stand on its feet.



Inexplicably, the government is keeping its fiscal cards close to its chest. It might yet play them in the near future but the damage to confidence and sentiment caused by mounting anxiety and uncertainty could have been and should have been avoided.

It is one of the many guesses that the Indian government’s reluctance to provide fiscal support to the economy stems from its fear of causing a spike in the government’s borrowing cost and weakness in the currency.



Some commentators who have discovered their piety and concern for the poor and others for fiscal prudence make this argument as well. Both of them could destabilise an already fragile financial sector as it would raise borrowing costs all around and render many sectors and businesses unviable causing them to default on their payment obligations.

Some argue that such a scenario would play out only if there is a failure to revive economic growth and fiscal pusillanimity would lead to precisely such an outcome. As with most arguments in economics, it is difficult to establish the superiority of one course of action over another for counterfactual scenarios are impossible in real time.

However, for a country with a young demographic and a potential for economic growth to exceed the cost of capital in the medium to long-term, the cost of excessive caution and prudence would be higher than the cost of excess action now.



This would be so in the medium to long-term even if the short–term costs of excessive fiscal activism appear higher.



One such fear is the fear of credit-rating downgrade. That reputational risk must be accepted and ignored, if it materializes.



Rakesh Mohan, the former Deputy Governor of the Reserve Bank of India, had the right attitude towards them.



In an interview for CNBC TV-18, he is reported to have observed that the credit rating agencies should have been the first ones to be put on the lockdown globally. He is right.

The credit rating agencies did not cover themselves with glory during the 2008 global financial crisis. They have not had to bear any meaningful costs for their behaviour. They are overcompensating now with prompt downgrades for actions taken by governments to support the normal economy whereas they gave governments the benefit of doubt when they bailed out bankers, financiers and stock market investors.



They are best ignored.



In any case, not just the credit rating agencies but the entire architecture of financial markets deserves a burial. If Covid-19 achieved that, it would have compensated for all the suffering it has caused humanity.

That said, there could be other solutions. To the best of my knowledge, Samiran Chakraborty of Citigroup in India has offered one such approach that marries the short-term imperative with medium-term considerations. He suggested a separate Covid budget.