The argument against a fiscal stimulus package for the Indian economy: (Live Mint, Editorial)

The argument against a fiscal stimulus package for the Indian economy: (Live Mint, Editorial)

Context

It is believed by many economists that unless structural problems like bad loans are fixed, quick-fix solutions such as a fiscal stimulus package are not likely to raise growth rates

What is a ‘Stimulus Package’

• A ‘stimulus’ is an attempt by policymakers to kick start a sluggish economy through a package of measures.
• A monetary stimulus will see the central bank expanding money supply or reducing the cost of money to spur consumer spending.
• A fiscal stimulus entails the Government spending more from its own coffers or slashing tax rates to put more money in the hands of consumers.

Why is it important?

• Stimulus acquired respectability after the US credit crisis of 2008 saw governments across the US, Europe, Japan and China rolling out large fiscal stimulus packages.
• India’s fiscal stimulus package in 2008-09 included a blanket 4 percentage point cut in the excise duty rates

o   Rs 20,000 crore in plan spending by the Government,

o    Rs 10,000 crore funding for infrastructure finance,

o    Export subsidies

o    Large government order for new buses to replace State public transport fleets.

Why the government must tread with caution?

• Fiscal policy is a potent instrument that must be used to alleviate the unemployment crisis, but first, supply-side constraints need to be systematically united.
• The synchronized easing of fiscal and monetary policies in the wake of the financial crash of 2008 stoked the fires of inflation, and led to a widening of the twin deficits in the subsequent years.

What are the arguments against the stimulus package?

• The biggest argument against a fiscal stimulus package comes from the example of borrowing spree unleashed by the central government in the late 1980s which culminated in the economic crisis of 1991
• The benefits of a fiscal stimulus are uncertain but the risks are clear
• India’s consolidated deficit is significantly higher than most other emerging markets of the world, as the latest issue of the International Monetary Fund’s Fiscal Monitor shows.
• It is worth noting that foreign portfolio inflows into India so far this year have been led by bond investors, who have pumped in a net of $22 billion in debt markets

What is the way ahead?

• The key reason for this is the pile-up of bad debt that has made lenders wary of lending afresh, and the pipeline of stalled projects that has stymied the flow of fresh investments.
• Unless such structural problems are fixed, quick-fix solutions such as a fiscal stimulus package are unlikely to raise growth rates sustainably.