India should keep public finances healthy

Public Finance9th April 2020: India must keep public finances relatively healthy to stave off a possible second wave of risks in the financial sector once the coronavirus crisis abates. The government’s recent steps to include Indian bonds in global indexes opens the door for unstable foreign capital inflows and policymakers must be vigilant about the nation’s banking sector. India cannot risk a significant widening of its perpetually high budget deficit.

At some point, international investors will begin to sharply distinguish between countries along with the principal measure of how successfully the health challenge is being met, which will determine how quickly and durably individual economies will get back on their feet.

Modi’s government has provided virus-relief stimulus of just 0.8% of gross domestic product, leaving the heavy lifting to the central bank, which has injected cash worth 3.2% of GDP since February. Despite this, bond yields are sticky because of concerns about the budget deficit given that revenue will fall sharply due to a lockdown to combat the virus, Patel said. He suggested banks retain almost all profits to enhance capital buffers rather than distribute dividends. if fiscal and monetary responses are overdone, the likelihood of macroeconomic instability increases. It is a fine line between aggressively proactive and being perceived as reckless

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