What stimulus

What stimulus

With no signs of revival in corporate investment or exports, and even private consumption taking a knock amidst a bleak jobs scenario, it’s not surprising to see a growing clamour for a fiscal stimulus amongst a large section of industry and economists. When nobody’s spending or investing, so goes the argument, the government should take up the slack, especially by putting more money in highways, railways, irrigation and other public-funded infrastructure. Yes, it might risk an overshooting of the Centre’s fiscal deficit, but that problem will take care of itself once growth returns and revenues, too, show corresponding buoyancy. Well, there are two problems with this traditional Keynesian prescription in the current Indian context. To start with, are there many shovel-ready projects with land acquisition and other statutory clearance formalities completed, on which work can be taken up immediately once funds are made available? Are there enough public sector managers today with the calibre and execution capabilities of an E. Sreedharan, Verghese Kurien or Narla Tata Rao?

The second issue relates to credibility. All past fiscal stimuli, especially the one post the 2008-09 global financial meltdown, have tended to extend beyond a reasonable period within which a demand revival and crowding-in of private investment would happen. The Centre’s own gross fiscal deficit soared from 2.5 per cent of GDP in 2007-08 to six per cent and remained at 5.9 per cent right till 2011-12. In other words, far from providing a necessary short-term demand boost to the economy, the stimulus became a tool for the then powers-that-be to engage in fiscal adventurism. The Narendra Modi government, unlike its predecessor, has so far shown much greater commitment to fiscal and monetary prudence. The resultant low inflation and stable exchange rate regime has, in turn, helped attract foreign capital flows, both direct as well as portfolio investment in equities and bonds. As a country that needs these flows to finance its external current account payments deficit, can it now afford to deviate from the path of macroeconomic stability? We don’t need to go back farther than June-August 2013 — when the rupee went into free fall — to understand the damage from the last so-called stimulus.

Given the doubts over the government system’s capacity for time-bound project implementation today, the objectives of a stimulus, if any, would be better served through a reduction in taxes, putting more disposable money in the hands of the public. India’s growth, at least till around the time of demonetisation, was being significantly consumer-propelled. If most products currently attracting 28 per cent and 18 per cent GST rates are moved to their respective next lower slabs — along with excise duties on petrol and diesel being brought down by, say, Rs five per litre — the resultant boost to consumption would be a far more effective stimulus than any ill-conceived push for public investment.