A demand-based stimulus may be key for recovery2 min read . Updated: 13 Jul 2020, 09:59 PM IST
Several recent discussions have evaluated the need for another fiscal stimulus focusing on the generation of demand that is over and above the already announced stimulus package. Mint studies the arguments for and against a second round of stimulus
Several recent discussions have evaluated the need for another fiscal stimulus focusing on the generation of demand that is over and above the already announced stimulus package. Mint studies the arguments for and against a second round of stimulus.
What has govt done to revive the economy?
The government had announced a ₹20 trillion package to help businesses and people cope with the impact of the pandemic. The package focused on providing immediate relief in the form of tax deferrals, cash transfers for the poor, and regulatory forbearance. This was later supported by credit guarantees for MSMEs and in-kind foodgrain transfers for the poor along with regulatory changes with the intention of preventing bankruptcies. The focus of these steps was largely to contain the economic impact of the pandemic and provide a cushion to deal with the lockdown imposed to contain the spread of coronavirus.
Was most of it supply- side intervention?
A demand-side intervention focuses on reviving demand with the intention of restoring economic activity. A supply-side intervention is one that looks at the supply side bottlenecks in the economy and straightening them out. The cash transfers along with in-kind foodgrain transfers are demand-side interventions, while the tax deferrals and regulatory forbearance are supply-side interventions. Credit guarantees can be essentially be considered macroprudential regulations, while the bulk of the supporting reforms under the stimulus package are pure supply-side measures.
Does supply-side not have an impact on the demand?
Say’s Law says that supply creates its own demand. However, there has been adequate evidence against the hypothesis over the years, which says that purely supply-side interventions will not be enough to deal with a situation where there is deficient demand in the economy. Therefore, a demand stimulus is just as important.
Does it mean we may need more stimulus?
As economic activity normalizes to pre-covid levels, there are concerns regarding the overall weakness in demand as lockdown is being lifted. This weakness in demand is partly due to the high uncertainty that has dampened discretionary consumption and fresh investments. It is also due to the temporary income shock that people have experienced either because of nominal wage cuts or by loss of jobs. With a recession, we should expect exports growth to be modest, which makes it key for the government to spend more.
What form should the govt stimulus take?
The focus should be on maximum impact on growth revival. Higher capital expenditure has a higher multiplier effect than an increase in outlay on schemes such as the MGNREGA. This would thus require the government to focus on higher public investments, especially on infrastructure. Doing so will encourage global supply chains to invest. The focus should be on speeding construction activity, ensuring timely payment, and initiation of fresh projects.
Karan Bhasin is New Delhi-based policy researcher.