Time for stimulus package

Author Published: 26th Sep 2017   12:05 am Updated: 25th Sep 2017   5:15 pm

The ailing Indian economy is in need of a booster dose to nurse it back to health. The conditions are ripe for unveiling a stimulus package: plummeting growth rate, stagnating exports, slowdown in the manufacturing sector and consumption and dwindling private sector investments. The overall mood is gloomy and the consumption is not picking up despite the approaching festival season. While acknowledging the slowdown, Finance Minister Arun Jaitley has already given indications of an imminent stimulus package to boost growth and investments. While the quantum of package is still in the realm of speculation, there is a need for the stimulus to focus on pumping money into reviving the stalled projects, particularly in the infrastructure sector, and recapitalising the banks so that they can extend additional credit. This could potentially spur private sector investments. Public expenditure should be raised in such a way that it stimulates private expenditure as well and spurs credit offtake. Fast-tracking the disinvestment process, providing easier loans to small and medium enterprises and reduction of tax rates to boost consumer demand during festival season should form the key components of the stimulus package. The additional revenues expected from the Goods and Services Tax (GST) regime can also provide a cushion for additional spending. Pumping money into rural infrastructure and affordable housing will help stimulate growth. However, a delicate balance has to be maintained between the need to spur growth and maintain fiscal discipline.

Since there is an urgent liquidity requirement to fund stimulus package, the government will have to be prepared for fiscal deficit to widen to 3.7% of the gross domestic product (GDP) for 2017-08 from a budgeted target of 3.2%. The stalled infrastructure projects form the low-hanging fruits and must be put on the fast track to boost economic activity. At present, the most important cause for worry is the growth rate slipping to a three-year low of 5.7% in the April-June quarter. Clearly, the double whammy of demonetisation that had sucked out 86% of the currency from the system and the GST hitches has further dragged down the economy, which has been slowing down since the first quarter of 2016. This is a far cry from a position that India enjoyed two years ago when it was seen as a rare bright spot in an otherwise gloomy global economy with the GDP growth outpacing a slowing China. But, since early 2016, the growth has fallen for six consecutive quarters. In the June quarter, India lost the fastest growing economy tag to China for the second straight quarter. In order to get to a GDP growth of 6.5% for this fiscal as a whole, the economy needs to grow at 7% in the next three quarters.