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Six rules of the fiscal game

Six rules of the fiscal game
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First Published: Thu, Jan 01 2009. 10 13 PM IST

Illustration: Jayachandran / Mint
Illustration: Jayachandran / Mint
Updated: Thu, Jan 01 2009. 10 13 PM IST
Governments across the world have come round to the view that a large dose of extra deficit spending is needed to tackle global recession. India is very much part of this consensus, though it has far less fiscal space for a spending spree.
Illustration: Jayachandran / Mint
One problem embedded in all consensus views is that they induce overconfidence and rashness. It is quite likely that a poorly designed fiscal stimulus will not deliver much, even as the economy is pushed into heavy indebtedness. The International Monetary Fund (IMF) has clearly abandoned its usual fear of fiscal profligacy and has been goading governments to spend. But it has also published a staff position paper on fiscal policy for the crisis, which has been available on its website since 29 December. The world’s premier financial crisis manager has laid down certain rules on how to design a fiscal stimulus and what pitfalls to avoid.
There are six basic rules: A fiscal stimulus should be large, lasting, diversified, contingent, collective and sustainable. Each requires some explanation. A fiscal spending programme should be large because of the scale of the damage to the world economy; lasting, because the battle ahead promises to be a long one; diversified because it is hard to guess which action will work and which will not; contingent, because companies and consumers need to be reassured that more will be done if matters worsen; collective, because we are in a global crisis that requires global action; and sustainable, because an explosion of debt will unsettle financial markets and create debt traps.
These are useful rules to judge how governments are planning their stimulus packages. IMF has also raised a few other red flags. For example, it warns against government support to flagship industries. The auto industry in the US is a prime example. India, too, has seen intense lobbying by powerful industries such as autos, real estate and airlines for tax breaks. There is a risk of political capture of fiscal programmes. Also, support for domestic companies invites retaliatory responses from other nations that could spill over into a full-fledged trade war.
And what about India? We have often said in these columns that India already has a high fiscal deficit and a further spurt in debt-financed spending could damage long-term economic health. The reality of political capture, too, is evident, as lobbies descend on New Delhi to grab parts of the new spending.
Does India have a good fiscal strategy? Tell us at views@livemint.com
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First Published: Thu, Jan 01 2009. 10 13 PM IST