The next government has a headroom of around 1% of gross domestic product (GDP) for launching another fiscal stimulus. That’s according to Union finance secretary Arun Ramanathan.
A former finance secretary, D. Subbarao, feels otherwise. His concerns centre on the “unwinding” of the three fiscal stimulus packages from the present government. How will the taxes forgone as part of those packages be brought back? Then, there are sequencing issues involved that are yet to be addressed.
Beyond economic revival, much of which depends on the performance of India’s export markets, is the issue of the cost at which “recovery” is made: A country cannot spend its way to recovery.
The plain fact is that the government’s enhanced expenditure has spooked the bond market, made rating agencies revise their outlook on India’s long-term sovereign rating and, of course, increased fiscal deficit to an alarming level of 11.5% of GDP. Given these problems, Ramanathan’s 1% spending headroom appears extraordinary, if not magical.