2 min read.Updated: 23 Oct 2020, 06:31 AM ISTLivemint
The government’s last two packages in support of India’s economy were far too modest and indirect to achieve much. A third roll-out, expected soon, could make up for those deficiencies
It would be safe to assume that India’s government is aware of an urgent need to embark on a large spending plan to inject the economy with money, a fiscal outlay that’s proportionate to the hit taken on account of covid-19. So far, its piecemeal approach has failed to inspire sufficient confidence among economic agents. The multiplier effect seen this fiscal year has been more about gloom going viral than income fuelling expenditure to fuel further income, fuelling still further expenditure. That despondency has begun to lift now, with signs of a pick-up in commercial activity. Also, there have been major monetary stimulus efforts made by our central bank, which has opened yet another big window lately for banks to borrow cheap funds for buying bonds or offering loans in specific sectors. However, the Centre’s fiscal support, counting both its earlier packages, has amounted to less than 2% of our gross domestic product (GDP). It is in this context that the government’s affirmation on Wednesday of a third fiscal stimulus on its way assumes significance. If done right, it could yet reverse downward pressures on aggregate demand, boost sectors beyond the few that were placed well to make post-covid gains, and set the stage for more than a mild recovery next year.
The government’s first package, announced in May, offered largely indirect support to a vulnerable section of our economy, most notably in the form of a credit guarantee scheme for small businesses, while the second one announced earlier this month was an attempt to spur private consumption by nudging its own employees to do so. The large figures cited along with May’s Atmanirbhar Yojana masked how small the actual outlays were. The Centre’s big credit backstop, for example, only involved taking on the burden of such loans going bad in the future. Easing credit for cash-starved enterprises is a worthy idea in its own right, but it had too many ifs and buts along the way, given India’s weak credit channels, before it could have had a noticeable impact on overall demand. Most of the Yojana’s other measures were also dependent on a state apparatus not known for high efficiency. Stimulus 2.0, while aimed at getting cash registers ringing and pushing up capital expenditure by the Centre and states, was also modest in terms of its financial allocation. What both those exercises lacked was a big dose of discretionary state spending, the sort that directly pushes cash around, multiplies transactions and gets things whirring all across the economy.
If the government has shown a marked reluctance to spend, it’s possibly because its finances were badly overstretched even before covid-19 laid siege. According to the International Monetary Fund, India’s GDP is likely to contract by 10.3% this fiscal year, perhaps the sharpest among large economies, while its fiscal deficit—Centre and states combined—is expected to swell to 13.1% of GDP, from 8.2% last year. Making matters worse, inflation remains a threat. However, a well-crafted stimulus package could aid a recovery without necessarily resulting in price spikes. We should consider direct cash transfers to the poor, who are likelier to spend it than others, and infrastructure projects that employ lots of workers and voraciously hog input materials. Other sectors that languish could do with help too. Pushing ahead with reforms and wooing funds from overseas, as Prime Minister Narendra Modi has been making efforts to do, would also have a role to play in a broad revival. But for now, all eyes are on Stimulus 3.0.