Fiscal stimulus

What is the state of economy?

• The OECD expects the world economy to shrink by as much as 7.6 per cent in 2020. India’s full-year economic contraction is estimated between 9 and 12.5 per cent.
• The pandemic has severely impacted both demand and supply.
• With two years of slowdown the balance sheet of both the government and the industry has already strained.
• The banking system is in deep distress to support growth.
• All the four engines of growth (Private consumption, Exports, domestic consumption, government spending) are declining.
• The pandemic has forced most central banks and the governments to announce large stimulus to ensure rapid post-Covid recovery.

What were the steps taken by government to revive the economy?

• Tight fisted approach: The government has chosen structural reforms and debt support, rather than offering large scale stimulus to revive the economy or a GST rate-cut, to revive economic growth.
• Agri-reforms: It has brought in agriculture reforms to boost the farm sector growth.
• Conditional Loans: It has allowed the cash-strapped States, to borrow more but on conditional basis. For example, undertaking reforms like ending free power to farmers.

Why government is not resorting to Fiscal stimulus?

• The stimulus offered so far is just 1.2 per cent of GDP whereas Japan’s stimulus stands at 21.1 per cent of GDP and US’ at 13.2 per cent.
• The government strongly believes of a V-shaped recovery is in progress but it is unclear whether this recovery will sustain.
• The government is worried that any fiscal stimulus if provided will have same impact that of the 2008 stimulus which caused sustained inflation.

What is the way forward?

• It is clear that without a strong stimulus, the recovery will be slow.
• Only a sustained increase in demand will push the industry to start investing again.
• If that happens, three of the four engines of growth will fire (public consumption, private investment and government spending) causing economic growth to return.