Stimulus watch

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Bikky Khosla | 26 Sep, 2017
News reports have surfaced that the Centre is considering a stimulus package in the range of Rs 40,000-50,000 crore to halt the ongoing growth slowdown. The basic idea behind fiscal stimulus is that when the overall economic growth is sluggish, feeble or in a state of contraction, the government should increase public expenditures so as to financially stimulate the economy. The theory also calls for measures like tax cuts, interest rate reduction, quantitative easing, to name a few. But economists often debate the merits of a stimulus, and this time too the proposal has not been greeted with open arms by many.

There is little doubt, however, that our economic growth has faltered. Only two years ago, India was touted as a rare bright spot in a gloomy global economy, but since early 2016 growth has fallen for six consecutive quarters. Our corporate investment has remained sluggish with the bad loan crisis continuing to hang like a sword of Damocles over the heads of both banks and companies. Private consumption has fallen and manufacturing and exports have lost steam. Additionally, demonetisation and the GST have further added to the woes. In this situation, a package of short-term measures to address specific problems sounds welcome.

But there are words of caution from several quarters. They opine that the stimulus could have an adverse impact on the near-term macroeconomic stability. In fact, even the long-term prospects could be impacted as it happened after the stimulus undertaken in the wake of the 2008-09 crisis, resulting later in double-digit inflation and wide imbalances, both domestic and international. Economists also point that the impacts of higher spending without a commensurate pick-up in revenues could be negative and private sector investment may not pick up despite higher public capex as it has been evident from the past two years' experience.

It looks like the Centre has till now done little to figure out the real causes behind the derailed growth story--why three out of the four main engines of the economy have not been working smoothly. Government spending has remained a priority, but it has so far met with little success in driving growth. And now the government wants to inject the economy with a stimulus. The question is, will it work? A lot will depend on how effectively the policymakers identify the real challenges facing the economy, recognize them and take balanced remedial measures based on sound economic logic.

I invite your opinions.