BackOpinion | A government keen to get money moving
Easing a credit crunch and pumping big money into the economy seem to be at the crux of the government’s revival agenda. The second part would call for difficult calculations
PremiumThe government on Friday offered the country a status report on what it had done to revive demand in a slowing economy. Broadly, these efforts are directed at pushing public capital expenditure, which is expected to have positive spillover effects on private investment. Second, it has worked on pumping money into sectors such as construction, automobiles, and small enterprises, where demand has fallen sharply. The hope here is that of a multiplier effect on consumption, as the money ripples out to generate incomes and set off purchases at various levels. Third, it has returned money to consumers and producers through tax refunds and bill payments. This is designed to free up cash for people and businesses to spend more. Finance minister Nirmala Sitharaman said that points of choked demand had been identified through interactions with industry representatives and if more were to emerge during her discussions leading up to the next budget, the government would intervene with alacrity. All of this is for the good, but is it enough?
Sitharaman’s report card is incomplete. For a better perspective of the Centre’s policy interventions, we must take other measures into account. Of the 11 state-owned banks that had their lending restricted over dodgy loans, the government has recapitalized or merged seven to get them back in business. The new mergers may be grappling with integration issues, but banks seem stronger overall. Significantly for lenders, efforts to unclog the bankruptcy pipeline and reduce litigation could help preserve the value of stressed assets and hasten the process of resolution. The enabling code’s ambit has been widened to cover financial companies, too. The Reserve Bank of India (RBI), on its part, has brought down the real rate at which it funds commercial banks almost to zero. Beyond such moves to ease a credit squeeze, companies have been offered tax cuts and exporters faster refunds. More goods and services are now in lower tax slabs. A farm income support scheme has been rolled out. The government has dipped into RBI reserves and recently pushed the pedal on privatizing state-owned enterprises. Much of this is for the good, but again, is this enough?
If the country attempts to spend its way out of the slump, two targets will have to be revised. The government’s fiscal deficit will go badly out of whack if it keeps up its spending momentum—there is talk of a vast infrastructure programme—unless it sells public enterprises on a scale never tried before. Given the tax giveaways it has announced, if the government chooses to put more money in the hands of the people via something akin to a universal basic income, the fisc will come under severe strain. The fiscal glide path may have to be recalibrated. Then there is the matter of RBI’s inflation target. India switched to explicit inflation targeting in 2016. The 4% goal set for the central bank, with a 2 percentage point band on either side, was valid for five years. However, with the economy failing to pick up, prices headed up, and the government set to prime the pump, the inflation target looks unrealistic. It may need to be reset for a new growth-inflation dynamic. Care must be taken, however, that a government splurge doesn’t go overboard. Nor must the state’s role in the economy get enlarged in a way that muzzles market forces or weakens private impulses. We must not end up in a stagflationary scenario: runaway prices with illusory economic gains.
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