ForumIAS announcing GS Foundation Program for UPSC CSE 2025-26 from 19 April. Click Here for more information.
Good evening dear reader.
Here is our 7pm editorial Summary for today
About 7 pm Editorial Summary – This initiative provides an in-depth analysis of the important news editorial of the day. Students don’t need to look anywhere more for their daily news analysis. We take the most important editorial of the day and provide its comprehensive summary.
For 7pm Editorial Archives Click HERE →
Infrastructure bonds could Aid a Economic Recovery
Context:
COVID 19 has brought global economic activity to a stand still. IMF estimates global GDP to contract by 4.9% in 2020-21. Indian GDP is also expected to contract this year as per RBI estimates.
To tackle this economic downturn, Atmanirbhar Bharat Abhiyan was announced by the government. It has policy measures like credit increase and guarantees, institutional reforms in areas like agricultural marketing. These measures provide liquidity support in near term and also institutional reforms for medium to long term growth.
Yet, to revive GDP growth in short to medium term, demand revival is needed. Let us understand levers of demand in an economy and which policy measure can aid in economic revival
Determinants of demand in an economy:
Keynesian economics provides for 4 determinants of demand. They are:
- Consumption (PFCE-Private Final consumption expenditure)
- Investments (GFCF – Gross Fixed Capital Formation)
- Government expenditure (GFCE)
- Net exports (NEX) i.e. difference between exports and imports determined by trade
For revival of GDP, any one of these components must be expanded.
Ineffectiveness of PCFE, GFCF and NEX for growth revival in India:
In recent years, reduced credit supply led to reduction of consumption (PCFE) and investment (GFCF) in India. Despite bank clean-up of NPA’s, credit availability is not optimal due to risk averse banks. Further, IL&FS crisis and resultant NBFC liquidity crisis had led to further reduction in credit availability. Due to economic uncertainty during COVID, banks will further reduce lending to avoid risk. This will negatively impact consumption (PCFE) and investment (GFCF).
In addition, due to anticipated job losses and pay cuts, households will reduce consumption on non-discretionary items and move towards precautionary savings. Hence consumption alone cannot revive demand.
Investments for new business expansions will also be unlikely due to low credit availability, economic uncertainty and low capacity utilization. RBI had reported capacity utilization of 68.6% in quarter 3 of FY 2019-20. This is not optimal as a minimum of 75% is needed for new expansions. Due to reduced revenues and credit downgrades, existing problems will increase leading to reduced investments.
Global trade contracted by 4.3% in March and this trend is expected to continue in near future. US-China trade war, disruptions of global value chains due to COVID 19 pandemic severely impacted global trade. Hence there is little room for more exports to revive growth.
Government expenditure to revive growth:
Only government expenditure can revive growth due to the subdued role of consumption, investments and trade. In pursuance of this, Infrastructure investment by the government has high returns in terms of growth revival. S&P estimates, 1% of GDP spend on infrastructure can boost real growth by 2% while creating 1.3 million direct jobs. Infrastructure creates long term assets while addressing supply and demand in the economy.
Infrastructure investment during an economic downturn is historically proven counter cyclical strategy. New deal in US during great depression; Germany’s revival post World war 2 and Chinese infrastructure investments after 2008 global financial crisis were examples.
China has announced $ 600 billion special bonds for economic revival post covid. India too can invest in infrastructure to complete NIP – National Infrastructure Pipeline
Development Finance institution and infrastructure bonds:
India has DFC-development finance institutions like IIFCL (India Infrastructure Finance Company Ltd), IRFL (Indian Railway Finance Corporation) and NIIF(National Infrastructure Investment Fund). But their scale and functioning is inadequate. Hence a single unified DFC can better leverage its assets to mobilize funds for infrastructure projects. This DFC must issue infrastructure bonds to fund projects of NIP.
It has following advantages:
- DFC can reduce risks of banks in credit for long term infrastructure investments. This can lead to greater lending by banks to businesses which will revive investment and hence growth.
- Municipal bonds and state government bond markets can be deepened.
- Global funds such as sovereign funds can be mobilized
- Bond markets for infrastructure bonds can be deepened in India. This solves a bottleneck in financing.
Conclusion:
Without demand revival, liquidity infusion will not be effective. In times of economic uncertainty due to COVID, only government spending can boost demand. A DFC and infrastructure bonds can be the best tool for the government to provide such stimulus.
Source: Indianexpress
Mains Question:
- What are development finance institutions? Discuss their role in economic growth especially in context of crises like COVID 19? [15 marks, 250 words]
