World Bank president Robert Zoellick last week warned governments about putting excessive faith in stimulus packages. “While the ($787 billion US) stimulus has given an impulse, it’s like a sugar high unless you eventually get the credit system working,” he said.
That point should not be lost on policymakers, especially Indian ones. As Zoellick notes, governments have placed too much attention on stimuli and too little on the risks of increased borrowing.
We aren’t fundamentalists about deficits, but there’s a real danger that policymakers will want to keep sustaining these brief sugar highs. For how that turns out, look at Japan and its lost decade.
The other danger is that when the economy does recover, politicians will start patting themselves on the back for their spending, when several factors could have helped the rebound. Instead, as the Indian economy begins to show signs of revival, the government needs to begin thinking of an exit strategy to reduce spending and correct enlarged deficits.