. The debate in India has focused on domestic-demand led growth not just as a short-run response to COVID-19, but as a medium-term growth strategy. All the evidence across the world and in India has shown that rapid and sustained economic growth requires export dynamism. India’s GDP growth of over 6 per cent after 1991 was associated with real export growth of about 11 per cent. Pre-1991, a 3.5 per cent growth rate was associated with export growth of about 4.5 per cent.
There is no known model of domestic demand/consumption-led growth, anywhere or at any time, that has delivered quick, sustained, and high (say 6 plus) rates of economic growth for developing countries. But even leaving aside the desirability of exports over domestic demand led growth, how feasible is the latter today? Policies that could achieve this are: More public spending, tax cuts to boost private consumption and private investment, and/or financial sector reform to boost private investment.
Against the current backdrop of bleeding public, financial, and household and private sector balance sheets, these policies look difficult. Only growth can rehabilitate balance sheets; stressing balance sheets further cannot realistically revive growth. Consumption growth will be limited by the fact that household debt has grown rapidly in the last few years. Consumption now can grow only if incomes grow.
Government spending could be a short run option, but COVID has limited that possibility. Post-COVID, India’s debt is expected to rise from about 70 per cent of GDP to about 85-90 per cent and deficits are likely to be in the double-digit range. The fiscal space for spending will be severely limited both because of high levels of deficits and indebtedness and because debt dynamics will be adverse unless growth picks up substantially.