New Delhi: The past few weeks have witnessed a heated debate on a fiscal stimulus package for India, with some economists, both within and outside the government urging the central government to loosen its purse strings to boost growth.

There are several reasons why the government must tread with caution on this issue.

The biggest argument against a fiscal stimulus package comes from India’s own economic history over the past few decades. The most obvious and extreme example is the borrowing spree unleashed by the central government in the late 1980s which culminated in the economic crisis of 1991, forcing a rapid and painful course correction.

However, one need not go that far back in history. It was mainly because of fiscal profligacy that India was relegated to the club of the ‘fragile five’ among the emerging markets of the world not too long ago. The synchronized easing of fiscal and monetary policies in the wake of the financial crash of 2008 stoked the fires of inflation, and led to a widening of the twin deficits (fiscal deficit and current account deficit) in the subsequent years.

The central government’s fiscal deficit hovered around the 5% mark even as the consolidated fiscal deficit averaged about 7% in the fiscal years 2012 and 2013. It is not so surprising that the Indian rupee was one of the worst hit in the summer of 2013, when foreign investors pulled out funds from emerging markets in anticipation of rising yields in developed markets.

Then, as in 1991, a course-correction followed, which has continued to this day, helping repair India’s balance sheets, and bringing down inflation. However, even today, India’s consolidated deficit is significantly higher than most other emerging markets of the world, as the latest issue of the International Monetary Fund’s Fiscal Monitor shows.

And this relative difference matters to foreign investors. It is worth noting that foreign portfolio inflows into India so far this year have been led by bond investors, who have pumped in a net of $22 billion in debt markets—nearly four times the investment in equities over the same period. Any stimulus package that causes a spike in the government’s borrowing programme and pushes up yields could precipitate a sell-off in the debt market. Even in 2013, it was the bond market sell-off that triggered the rupee crisis.

Any deviation from the path of fiscal consolidation will also mean that India can kiss its chances of a ratings upgrade—for which Indian officials have been lobbying for some time—goodbye. As an earlier Plain Facts column pointed out, sovereign ratings of a country are not related to the stock of public debt. However, they seem to closely track the level of fiscal deficit over the medium term.

Given that sovereign ratings tend to influence the outlook of foreign investors, and determine the rates of interest at which domestic firms can raise capital abroad, any slippage, or even a threat of a downgrade, can have adverse consequences for the economy.

Finally, some proponents of a stimulus package have argued that a relaxation of the fiscal deficit is justified if the extra borrowing is used for capital expenditure, which can help revive the investment cycle, and push up growth. While this is true in theory, in practice, the government has been unable to revive the capex cycle despite having pushed new projects early in its term. New project announcements by the public sector rose shortly after the Narendra Modi-led government assumed office but the momentum has not been sustained.

But even when new public sector projects went up, they failed to raise the level of overall investments in the economy significantly. The share of investments, or gross fixed capital formation (GFCF), in India’s gross domestic product has in fact been falling over the past few years, from 32.1% in the June 2014 quarter to 29.8% in the June 2017 quarter.

The key reason for this is the pile-up of bad debt that has made lenders wary of lending afresh, and the pipeline of stalled projects that has stymied the flow of fresh investments.

Unless such structural problems are fixed, quick-fix solutions such as a fiscal stimulus package are unlikely to raise growth rates sustainably.