Sanjay Jha column: Fiscal stimulus fails to stimulate

·4 min read

Human attention time is short-lived. In a way, unknowingly we all possess spiritual skills of living in the moment. Nothing else can explain why the dismal state of the Indian economy went under the radar as the second wave of the coronavirus played havoc with India beginning mid-March 2021.

Survival was the only leitmotif, everything else could wait. While the daily cases have substantially reduced since the peak of 410,000 by about 90% to 40,000-odd today, it remains alarmingly high at about 50% of the 2020 peak. To say that we are out of the woods will still be premature, albeit there are reasons for curtailed optimism.

That brings us to the billion-dollar question: where is the Indian economy headed? For one, those who were euphoric about a V-shaped recovery can perhaps tell themselves that it was always just a pipe-dream. India’s recovery is still miles away. The recently announced ‘fiscal stimulus’ (meaning enhanced government spending) once again misses the bus.

There is an underlying assumption that all Indians need is a swift loan at a concessional rate to start investing or spending. That is a flawed assumption. Any borrowing creates a liability depending upon the duration of the loan, the loan amount and the interest rate.

While an attractive rate can motivate purchases or investments there is a lesser probability of the same happening immediately. There is a lag factor that comes into play.

Furthermore, people usually become more penny-pinching in uncertain market conditions. And India needs a booming demand environment now. The fiscal stimulus fails to get this point as it sticks to classical conservatism of supply-side economics of the Reagan era.

For over a year, there has been record unemployment (9% as of June 2021), which means lesser income and therefore lesser spending. That, in turn, keeps demand suppressed aggravating miseries further. But the government continues to stubbornly refuse to put money into people’s pockets. It is myopic. And self-defeating.

Despite getting a blockbuster tax windfall of Rs 145,000 crore in 2019, India’s private corporate sector has not been able to create any growth multiplier. Buoyant equity analysts had foolishly compared that to the 1991 economic reforms; it revealed their intellectual dishonesty.

Basic data research would have told them that capacity-utilization of industry was at 70% maximum. Why would they borrow to invest in plants and machinery and optimize operations? They did not, and that is evident from the fact that even declining RBI repo rates have not increased credit take-off.

The pandemic was a knockout punch. But the government does not get elementary data right. Sluggish auto-sector sales of both two-wheelers and passenger cars should provide a red flag warning to the apparatchiks involved in policy making.

The reverse migration leading to rising MNREGA demand is a manifestation of both rising urban unemployment and rural depravity. The government continues to mercilessly exploit the common man through excise duties on petroleum goods, thus collecting Rs 350,000 crore every year as easy-money.

Instead, if they allowed that astronomical mop-up to be in public hands that would result in consumer spending which could reignite investment demand.

India’s poverty numbers have worsened (75 million). 97% of Indians are worse off than before. Income inequality is further skewed. Since fiscal profligacy even in the post-pandemic emerging market economies is not a bad word, it is surprising that the government has chosen to be tight-fisted.

There can be only one explanation for this irrational miserliness: it is scared of the Godzilla of inflation. While rising fuel prices will certainly fuel costs and thereby inflation, the government believes that providing cash vouchers or direct benefit transfers to the poor and the needy will add more firewood to the rising embers of flames.

Political parties dread the prices of onions, potatoes and milk before elections (Uttar Pradesh, Goa, Uttarakhand, Manipur and Punjab await a public referendum in early 2022).

But there is always a trade-off. You cannot please all. And those who are in the bottomless pit of the food chain will also have their fingers on the EVM machine too. The government has got both its feet on a banana peel. But let it be said here, this is the perfect time to print cash and liberally fund poor people’s bank accounts. Spending is still pending.

Disclaimer: The views expressed in this article are the personal opinions of the author and do not reflect the views of Yahoo India. Yahoo India does not assume any responsibility or liability for the same.

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