China has brought out its bazooka. The government in Beijing announced over the weekend that it would spend a jaw-dropping $586 billion to boost local demand and support faltering economic growth. This package includes an ambitious plan to build rural infrastructure, higher support prices and subsidies for farm produce and tax breaks for corporate investment.
Can India do something similar? Prime Minister Manmohan Singh has already hinted that government spending could become a substitute for weak private demand. “I think we are in a typical Keynesian situation where there is a lack of demand—private sector demand is very weak—but strong government demand, for both social services and for physical infrastructure, will provide the essential stabilizers that our country needs in a time like this,” he said on the way back home from a recent visit to Japan and China.
It is not that easy. There is a huge difference between the state of government finances in China and India. The former runs a budget surplus and, thus, has ample room to spend its way out of trouble. India is not so lucky. It has a consolidated budget deficit that is now close to the highest in two decades.
A huge increase in official spending in these circumstances can be risky for us. It is likely to crowd out the private sector when banks buy government bonds that are sold to fund the extra expenditure. Or it can lead to higher inflation in case the higher deficits are financed by printing new money. Thus, India should be more careful than China in announcing huge fiscal support for the economy.
This brings us back to a persistent grouse voiced in these columns. The United Progressive Alliance regime squandered a brilliant opportunity to get its finances in order during the splendid economic boom that delivered record tax collections into the government kitty. India should have had a very slim fiscal deficit right now, if the tax money had been used to bring down debt and other revenue expenditure had been capped. That did not happen.
In short, India is not prepared for a downturn. This unfortunate episode of policy myopia leaves the government with few arrows to fire. And China-like bazookas? Forget it.
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