Graphic by Naveen Kumar Saini/Mint (Bloomberg)
Graphic by Naveen Kumar Saini/Mint (Bloomberg)

Why clamour for fiscal stimulus has become louder worldwide

  • FM announced a mix of measures to improve liquidity and boost demand in some sectors
  • As interest rate cuts have failed to yield desired results, many governments are planning fiscal stimuli

Finance minister Nirmala Sitharaman on Friday announced some calibrated measures, which should come as a relief to the markets, especially so, with the withdrawal of certain additional taxes on a section of investors. Some measures involved improving liquidity, while others were aimed at boosting demand across sectors including automobiles.

Note that while central banks across the globe have resorted to rate cuts, it has so far not had the desired effect. Not surprisingly, the clamour for fiscal stimulus has been getting louder globally. Even some members of the Reserve Bank of India’s monetary policy committee (MPC) had suggested a coordinated policy action, which involves fiscal measures, along with rate cuts.

Of course, given the limited room on the fiscal front, it would be foolhardy to expect major reforms from the government.

“In India’s case, based on the current fiscal health of the states and the Centre, there is limited legroom. We feel that deviation from stated fiscal deficit targets can impede monetary policy transmission," said Anubhuti Sahay, senior economist at Standard Chartered Bank.

Despite that, while Sitharaman’s Friday announcements dashed hopes of any major fiscal stimulus, analysts expect the follow-up press meet announced by the ministry may include more measures.

“The plunge in the Argentine peso was a stark warning on how fragile investor sentiment has become. Not surprisingly, more governments have started preparations for fiscal economic stimulus packages," said Philip Wee, forex strategist at DBS Bank Ltd, in a report on 21 August.

“India is aware that its four rate cuts have not been effectively transmitted to its real economy. Thailand has announced a THB 316 billion stimulus package with subsidies for farmers, cash handouts for low-income earners and domestic tourists. In Europe, Germany has started to prepare for fiscal stimulus in the event of a recession, a scenario the Bundesbank no longer considered improbable," Wee wrote in the report.

Back home, the latest minutes of the Monetary Policy Committee (MPC) meeting showed that out of the cumulative 75 basis point repo rate cut in the February-June period, only 29 basis points were transmitted. A basis point is one-hundredth of a percentage point.

“Dovish policy responses in major economies should help stabilize growth, but at a slower run rate than we have seen in recent years. Some of the policymakers have acted or are considering to provide support via fiscal stimulus," said Sahay of Standard Chartered Bank.

How long the domestic and global slowdown will continue is anybody’s guess. So, measures, be it rate cuts or fiscal stimulus, may be sentimentally positive, but are unlikely to provide a quick fix to growth woes.