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Does Growth Lead to Debt Sustainability? Yes, But Not Vice-Versa! 79

¾ As the COVID-19 pandemic has created a significant negative shock to demand, active
fiscal policy – one that recognises that fiscal multipliers are disproportionately higher
during economic crises than during economic booms – can ensure that the full benefit of
seminal economic reforms is reaped by limiting potential damage to productive capacity.
As the IRGD is expected to be negative in the foreseeable future, a fiscal policy that
provides an impetus to growth will lead to lower, not higher, debt-to-GDP ratios. In
fact, simulations undertaken till 2030 highlight that given India’s growth potential, debt
sustainability is unlikely to be a problem even in the worst scenarios. The chapter thus
demonstrates the desirability of using counter-cyclical fiscal policy to enable growth
during economic downturns.

¾ While acknowledging the counterargument from critics that governments may have a
natural proclivity to spend, the Survey endeavours to provide the intellectual anchor
for the government to be more relaxed about debt and fiscal spending during a growth
slowdown or an economic crisis. The Survey’s call for more active, counter-cyclical
fiscal policy is not a call for fiscal irresponsibility. It is a call to break the intellectual
anchoring that has created an asymmetric bias against fiscal policy.

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Alesina A, & Perotti, Roberto, 1999. “Budget Deficits and Budget Institutions,” NBER Chapters,
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