Pandemic Stimulus Backfired

Synopsis: The world reacted to downturn of economy by spending in different bands. The results are not the same even in same band of stimulus owing to various reasons listed.

Introduction

The data on aggressive monetary and fiscal stimulus of the top emerging and developed markets and the strength of the ensuing recovery showed no direct relationship.

Emerging markets which stimulated most aggressively got no payoff in a faster recovery, owing in part to
the downsides of overindulging.

How much did India spend and what are the results?

India went into the crisis with a large deficit, which limited how big it could go on stimulus. Its package amounted to 10% of GDP, mid-size compared to its peers. But its payoff for moderation was one of the strongest recoveries in emerging markets.

A moderate spender, India suffered mixed backfire effects. A relatively little negative impact on its inflation and interest rates, but a relatively large impact on its currency value. A deficit of 11% of GDP, highest among major emerging markets, but this condition existed before the pandemic.

Why is stimulus showing unclear benefits, and even backfiring in many emerging markets?

The stricter the lockdown and the slower the vaccine rollout, the bigger the hit to growth.

Emerging country overwhelmed by factors unique to the pandemic, including the global impact of massive stimulus in the US and other developed countries, and the fight against the virus.

Developing nations lack the financial resources and the institutional credibility to ramp up spending without unbalancing the economy, and end up getting impacted by global markets.

The logic of stimulus campaigns may have more to do with politics than economic conditions. The populist measure of spending huge may have backfired them.

Source: This post is based on the articles “Pandemic Stimulus Backfired” published in “Times of India” on 26th October 2021.