UPSC CSE Mains Syllabus: GS-3- Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment

Recently, Moody’s Investors Service (“Moody’s”) downgraded the Government of India’s foreign-currency and local-currency long-term issuer ratings to “Baa3” from “Baa2”. It stated that the outlook remained “negative”.

The latest downgrade reduces India to the lowest investment grade of ratings and brings Moody’s — which is historically the most optimistic about India — ratings for the country in line with the other two main rating agencies in the world — Standard & Poor’s (S&P) and Fitch (see attached chart on the brief history of India’s sovereign rating).

Monetised deficit is the monetary support the Reserve Bank of India (RBI) extends to the Centre as part of the government’s borrowing programme. In other words, the term refers to the purchase of government bonds by the central bank to finance the spending needs of the government. Also known as debt monetisation, the exercise leads to an increase in total money supply in the system, and hence inflation, as RBI creates fresh money to purchase the bonds. The same bonds are later used to bring down inflation as they are sold in the open market. This helps RBI suck excess money out of the market and rein in rising prices.

India’s economic woes:


Government’s fiscal measures so far:

(‘Discretionary fiscal stimulus’ refers to an increase in the fiscal deficit caused by government policy as distinct from an increase caused by slowing growth, the latter being called an ‘automatic stabiliser’ ).

Still concerns remain:

Impacts of monetary deficit:

Objections: The main objection to such a stance is it may create inflation.

Is the objection valid:

Way ahead:

Source:” The Hindu “.

Possible UPSC CSE Mains Question:

The Indian economy is facing several crises. In this scenario, how could it go for deficit funding without being impeded by the woes of mounting public debt?