Fiscal Stimulus!!!

The Indian government announced a fiscal stimulus valued at about $ 6 billion (Rs 30,000 crores). This is not the total sum of money injected into the system, but includes all the potential tax revenue forgone. The size of this stimulus seems modest when compared to the stimulus announced by the other countries. US had announced a stimulus of $ 700 billion, which is expected to cross the $ 1,000 billion. The Euro-zone is expected to have a stimulus of similar size. The Japan is expected to announce a package of more than $ 200 billion and China is expected to have a package of more than $ 500 billion. Even an economy as small as Peru has announced a package of $ 13 billion, which it plans to spend on improving its infrastructure. A $ 6 billion fiscal stimulus looks even too undersized for a $ 1 trillion economy as ours.

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We need to come to terms with the fact that, government is taking these actions more with a populist intention (national elections are due in May 2009!) than with an aim to improve the growth rate. The government went ahead with a cut in fuel prices. These bunch of jokers at the helm of the country, did not mind to increase the fuel prices when crude went up levels of $ 140 a barrel. But reduction in the price came with out thinking of other fiscal compulsion. These oil Navratnas were on the verge of bankruptcy till some time back, courtesy: mismanagement by politicians. The government should not have cut prices, rather used the surplus funds generated from sale of crude to repay all the accumulated under recoveries of oil companies and further to subsidize the use renewable energy.

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There has been a cut in CENVAT and Excise duties. All of this will take the fiscal deficit of both centre and State to the region of around 10 % of the GDP. To find the real deficit, one needs to add “Off-budget” items such as oil-bonds, which were fiscal innovations by the politicians. .

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All this mismanagement is done well by appropriate actions of RBI. YV Reddy was criticized for his action during his tenure as the governor of RBI. Probably, none of his predecessors faced challenges like he did. None of the earlier governors had to face crude running up 3 times and high growth rates of more that 8 percent. All of this was handled well with keeping the inflation low for most of his tenure. The PNB chief rightly complimented his efforts which I believe primarily insulated the economy from the destructive effects of global meltdown.

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The monetary authority has taken lead in tackling the crisis. It has slashed interest rates to boost consumption by increasing the credit off take. It seems it is not “Credit availability” that’s a problem but it is that is “credit distribution” that is the problem. Hopefully these measures will serve the purpose and get the economy back on high growth track (before anymore populist measures spoil the economy!!!).