Govt’s weak medicine

Govt’s weak medicine

The fiscal package that the government announced on Sunday to stimulate a sagging economy is a welcome complement to the interest rate cuts announced by the Reserve Bank of India on Saturday.

The basic combination of tax cuts and fresh spending seems weak in comparison to the policies that many other countries—especially China—have put in place since the global economy went into a tailspin. The weak response in India is largely due to the fact that our public finances are under strain, an almost unpardonable mistake at the end of a four-year economic boom.

What remains to be seen is what this fiscal push does to the eventual growth rate. Basic economics suggests that the response depends on the propensity to consume, the marginal tax rate and the propensity to import. Our first-cut belief is that the weekend stimulus package will be less effective than the government would have us believe.

Yet, the decision to pay special attention to housing is a smart move, because a revival in construction has more positive effects on demand and employment than most other sectors.