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Business News/ Politics / Can private demand fill stimulus gap?
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Can private demand fill stimulus gap?

Can private demand fill stimulus gap?

Graphic: Paras Jain/MintPremium

Graphic: Paras Jain/Mint

Mumbai: There is usually an economic strategy underlying every government budget, a subtext that gets hidden behind all those airy promises to the people and all that dry verbiage about depreciation rates on new power projects and subsidies for hand-rolled beedis.

The managers of the Indian economy have to wrestle with an important strategic question this year: Can private demand fill the vacuum that will inevitably be created when the government rolls back its fiscal stimulus? Will companies build new factories and consumers buy new cars even as the government tries harder to live within its means?

Graphic: Paras Jain/Mint

A simple way to understand these strategic dilemmas is to slice economic growth into its components. Any economy has four main growth drivers: private consumption, investment demand, government consumption spending and net exports. Think of this as the four propellers of an airplane.

The Indian economy has in recent quarters resembled a plane trying to stay in the air despite multiple engine failure. India depended heavily on one propeller—government spending—to stay on its flight path after consumer spending and investment spending stopped whirring.

The reasons are easy to understand. Consumers and companies froze in fear after the worldwide financial panic and economic contraction in September 2008. Consumer spending weakened and companies decided to hit the pause button on their capital expenditure plans.

The growth rates in the first half of this fiscal versus those in the first half of the previous fiscal tell a story: Private consumption spending grew by an anaemic 3.8% and investment spending by a mere 5.8%. An 18% rise in government spending saved the day, though it took the fiscal deficit to a 15-year high and could pose problems this year as investors get worried sick due to growing sovereign risk in countries as diverse as Dubai, Greece and the UK.

Anyway, a plane flying on one engine is always going to be a gut-wrenching experience for passengers. The earlier the other engines start whirring, the better it is for the Indian economy. The initial signs are encouraging, with both consumer spending and capital spending likely to recover in the coming quarters.

Also Read All of Mint’s Budget coverage

But this cannot be taken for granted and may need to be supported by policy, especially to encourage companies to invest in new projects and expand production capacity, so that India can once again be an economy propelled by private consumption and investment.

A fresh dose of reforms would be welcome at this juncture: privatization to make government enterprises more efficient, a new tax order that is easy to understand and does not distort economic decisions, moves to build a deeper and wider financial sector so that more Indians can get access to modern financial services, and a huge push to build roads, ports and other types of physical infrastructure. In short, what the Indian economy needs right now is a reform push rather than a fiscal push.

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Published: 10 Feb 2010, 10:31 PM IST
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