I don’t think fiscal stimulus is going to be a complete answer nor does evidence from other countries say that it is a complete answer. If you look at other countries which have had very large fiscal packages, they have not escaped large reductions in GDP
NEW DELHI: A day after finance minister Nirmala Sitharaman announced a fresh set of measures to stimulate demand in the economy by incentivising spending by the central government employees and through additional capital expenditure, expenditure secretary in the finance ministry T.V. Somanathan explains the rationale behind the package. Edited excerpts:
What's your assessment of the current state of the economy?
The worst effects of the pandemic are over. We are beginning to see the recovery. The recovery is visible in a number of sectors, whether it is power consumption, GST collections, the recovery is fairly good. Even in terms of consumer behavior, there is some recovery. Whether it will be sustained in the remaining quarters of the year is a matter to be seen. So I am cautiously optimistic.
Do you think the measures that the government so far has announced will be sufficient to put the economy on a sustainable recovery path?
I would slightly look at it differently. I don’t think that there is any fiscal measure which the government can take which can completely obliterate the adverse effects of the pandemic that we have been subjected to. Just as there is no vaccine for covid, public expenditure is not a vaccine for the covid-affected economy. At best it can be an HCQ (Hydroxychloroquine); it is an insufficient remedy for the problem because the basic problem is people need to feel free enough to move, to communicate, to attend schools, to go to cinemas, to go to restaurants-- that can’t be done by a fiscal stimulus alone. I don’t think fiscal stimulus is going to be a complete answer nor does evidence from other countries point to the fact that it has been a complete answer. If you look at other countries which have had very large fiscal packages, they have not escaped large reductions in GDP. Yes, there is a correlation between government expenditure and level of GDP, but I don’t think government alone even with large stimuli will be capable of addressing the problem. The part of the problem is going to be addressed when the pandemic recedes. It will be an organic process wherein the economy will recover.
Many analysts are pointing out that the initial spurt in activity that we are currently seeing may come down eventually after the pent-up demand comes down. Do you agree with that?
It is a possibility, but I don’t personally think that is likely because if we were seeing something like pent-up demand, then we should be seeing a huge spike (in consumption), it would be pent-up demand if it was higher than last year’s figures significantly. I don’t think that is the case. So I am not yet convinced by the pent-up demand argument. I think it is restoration of normal demand.
What was the whole idea behind the latest set of measures announced by the finance minister?
The finance minister put it in a simple and effective way: Today’s solutions should not be tomorrow’s problem. We do have experience in the past that a large stimulus is given in response to an exogenous shock and it is widely welcomed but it can sow the seeds of subsequent problems. The expenditure stimulus that has been put out now has two elements: one is self-financing. If you look at the festival advance, it advances the expenditure from the future to the present. So it changes the timing of the expenditure and gets recovered against future salary. But that is exactly what we want. We want (people to have) something to spend now, we don’t necessarily want to keep the expenditure high into the future. In the case of leave travel concession, we are trying to advance the expenditure because if it was not given then people would wait until they can travel. In this pandemic affected situation, we are quite doubtful that many government servants would want to undertake travel for pleasure just for the sake of LTC. What we are saying now is we are not insisting that you travel, instead we are insisting that you use this as a voucher which will essentially give you a discount of 33% on anything that you buy, provided it is taxable by 12% or more and provided you pay it digitally. Why you need all these conditions is to make sure that the expenditure actually happens and secondly, to leverage the private savings of government servants into stimulating the economy. Both LTC and festival advance don’t involve long term fiscal excess commitment. We are assuming one fourth of the government servants will opt for this.
The second component, capital expenditure is an extra fiscal commitment. But a lot of studies such as by NR Bhanumurthy and by another expert from NIPFP done in 2013 and an RBI study in monetary policy report of April, 2019 who have given estimates of multiplier of domestic capital expenditure. The figures range from 2.5-4%. So the domestic capital expenditure has a high multiplier effect. So we are hopeful that while the expenditure will go up, the GDP will go up more than proportionately. Therefore it is a sustainable increase in public expenditure. So we are keeping an eye on debt sustainability.
Some analysts are raising a question that is the government not sending a wrong signal by giving out more cash to the central government employees whose salary and job has been secure during the pandemic whereas many people in the formal and informal sectors have lost their jobs and livelihood.
That’s why we are asking the government servants to spend twice of what we give which goes into the economy. This is a case where we are using the spending power of government employees to benefit those who are not government employees.
Was it the last set of measures from the government for the current fiscal year or can we expect more?
As of now, I don’t think there is anything else planned. But in real life nothing can be ruled out. Finance minister has always said that we will keep watching the situation and react periodically as and when the situation warrants. So I can’t give you a commitment either way.