Finance Minister Nirmala Sitharaman.

Finance Minister Nirmala Sitharaman has been facing tremendous pressure to release fiscal stimulus amid the ongoing economic slowdown. However, it comes as a breather that she didn’t give in to pressure, former Reserve Bank of India Governor Duvvuri Subbarao wrote in The Indian Express today. “That she did not succumb to the temptation is a big relief as any attempt to spend our way out of the growth slump would have been a futile endeavour; worse, it would have triggered deeper problems down the line,” he wrote. The rationale behind not inducing more stimulus is that there is already enough in the system and going any further would have meant deepening the crisis.

India’s Union Budget 2020 was widely anticipated to bring big bang announcements to provide a boost to the economy at the cost of widening the already excessive fiscal deficit. However, the same wasn’t delivered. India’s fiscal deficit for both the current and next fiscal at 4.6% and 4.3%, respectively, is already excessive, and FM Sitharaman also acknowledged off-balance sheet borrowings of 0.8% of GDP for both the current and next financial year. “Add to this the unrealistic projections of revenue growth and disinvestment proceeds for next year and we have a potentially unsustainable fiscal situation,” Duvvuri Subbarao wrote. Further, any fiscal stimulus on the top of current amount would also have hampered RBI’s ability to revive investment. The same will have a negative effect and will hurt efforts to attract foreign capital, bring down the sovereign ratings, and can stoke inflationary pressures at a time when it is already above the target range.

There are several arguments in favor of fiscal stimulus such as India’s debt-to-GDP ratio is low in international terms, India’s debt is mostly in domestic currency while many emerging economies are on the other side of the spectrum and that foreign exchange reserves are robust and a balance of payments crisis is improbable. However, previous experiences show that the same have led to crises in the past, Duvvuri Subbarao wrote. Instead, the government can look into kickstarting private investment by implementing structural and governance reforms. The first step towards spurring the economy means building investor confidence.