India’s fiscal prudence strategy paid off as massive stimulus from the US and Europe backfired

India’s fiscal prudence strategy paid off as massive stimulus from the US and Europe backfired

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As the US, UK and EU face a double whammy of unprecedented inflation and negative growth, there is a school of thought that argues that India’s prudent fiscal policy has bearing fruit.

Over 2022-2023, India’s growth will average 7%, the strongest among the largest economies, contributing 28% and 22% to Asian and global growth, Morgan Stanley said in a report.

India is best positioned in Asia to provide alpha to domestic demand. Its cyclical recovery will be supported by structural factors.

The recent round of strong data reinforces our confidence that India is well positioned to provide alpha to domestic demand, which will be particularly important as weak growth in developed markets trickles down to demand. outside of Asia, Morgan Stanley said.

Some observers argue that while the Russian-Ukrainian war certainly contributed to the misery of the West, it was triggered during Covid-19 when the governments of these countries went on a massive spending spree to stimulate the economy, pushing inflation to a level when growth was slowing.

These observers argue that the so-called economists were “pushing” India to follow the same path as these Western countries.

They recall that some were glorifying US$3,200 for everyone, Germany’s revival and the UK’s furlough scheme – trying to antagonize the Indian public and push Indians to demand something of similar.

Prominent international economists were pressuring the Indian government to spend 5, 10 or even 15% of all GDP on stimulus.

Other economists predicted other variable and large amounts to be distributed without worrying about inflation.

Despite repeated pressure from “fancy economists”, the intelligentsia, profiteers, the government was fiscally prudent and knew the dangers unchecked inflation can pose to the Indian economy and public.

He repeatedly prioritized very cautious spending and targeted stimulus only to sections that desperately needed it.

Observers say that today, India is the only major country that is not only at minimum inflation risk, but also posted 13% growth this quarter.

The central government under the leadership of economic adviser Sanjeev Sanyal has repeatedly maintained the stance of fiscal prudence and provided incentives to stimulate the economy at the “right time” and “right groups”. Even Arvind Panagariya was in favor of government policies aimed at maintaining fiscal prudence.

Observers say the strategy has paid off in a big way. Economists and fanciful intellectuals prescribed policies for India that have now sounded the death knell for the West. Fortunately, the Indian government’s team of economists assessed the situation much better and did not give in to the immense pressure.

Experts say that over time, more and more evidence as well as an emerging consensus that senseless stimulus has done more harm in the long run, even in major economies that were in fiscal surplus before the pandemic or which were very advanced.

Morgan Stanley said the key change in India’s structural story is the clear shift in policy focus towards increasing the productive capacity of the economy. Policy makers have embarked on a series of reforms that will catalyze a resumption of the private investment cycle, helping to unleash a powerful productivity dynamic, leading to the triggering of a virtuous circle.

Cyclically, the economy is recovering after a long period of adjustment. The backdrop of healthy balance sheets and growing business confidence bodes well for the outlook for business investment, according to the report.

The biggest challenge emerging from India’s macroeconomic outlook was the sharp spike in oil and commodity prices weighing on macroeconomic stability.

However, with the 23-37% drop in oil and commodity prices since the March 22 peak, we believe that macro-economic stability indicators will return to the comfort zone.

Against this backdrop, we anticipate that RBI need not raise rates deeply into restrictive territory. In other words, RBI will not need to significantly slow domestic demand growth to control macroeconomic stability indicators, according to the report.