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DAILY NEWS ANALYSIS

  • 03 February, 2021

  • 2 Min Read

Interest Rate-Growth Differential

Interest Rate Growth Differential

"If the interest rate paid by the government is less than the growth rate, then the intertemporal budget constraint facing the government no longer binds."- economist Olivier Blanchard.

  • The “intertemporal budget constraint” means that any debt outstanding today must be offset by future primary surpluses.
  • If the Interest Rate-Growth Differential (IRGD), the difference between the interest rate and growth rate, becomes negative, the governments need not worry about deficits since the growth would take care of the interest payment obligations. This would ensure the sustainability of public debts.
  • The Economic Survey argues that in India, the growth rate is higher than the interest rate most of the time. So the conventional restraints on the fiscal policy may not be the right way ahead given the serious contraction of the Indian economy.
  • Washington Consensus - It is a framework that advocates for macroeconomic stability.
    • Macroeconomic stability roughly means that the borrowing done to finance the deficit of a country must be kept to a minimum.
    • This is a concept in peril as the economies of the world look to fight the after-effects of COVID-19 induced slowdown successfully.

Source: TH


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