The new United Progressive Alliance government has chosen to play with fiscal fire with its borrow and spend budget. It’s no doubt a dangerous game that can result in a bonfire of vanities if economic growth does not recover soon.
The standard response to such fears: Isn’t everyone else doing it? That’s true. But most countries started with lower debt and deficits, and so have the headroom to splurge. Let’s face it: India does not have that space.
Pranab Mukherjee seems to have decided to focus the fiscal stimulus on consumers rather than firms (as he did in the three previous stimulus packages) or on public spending on projects (which take a lot of time). That means he has put money in the hands of individuals, be it the poor through various social programmes or the middle class by removing the surcharge on income tax. This strategy is at odds with what many other countries are doing, but is perhaps more suited to India right now.
This budgetary gamble will succeed only if growth perks up soon. Otherwise, we see trouble ahead.