Crafting a fiscally neutral stimulus

With a slew of industries in the grip of a prolonged slump, a package of measures that will boost demand without burdening the exchequer is imperative

The Indian economy is experiencing a slowdown. Demand is tepid. Market sentiment is adverse. A normal fiscal stimulus to create demand is ruled out due to the government’s commitment to keep the deficit low. The Reserve Bank of India has cut lending rates to stimulate growth. One view would be to wait and hope for the downturn to end as lower lending rates and increased liquidity begin to have an impact. The other would be to also take some unconventional steps that have no — or at best marginal — fiscal implications to stimulate demand.   

The auto sector is in distress and is asking for help. One measure which is required for reducing air pollution is to provide incentives for scrapping old commercial vehicles. BS VI fuel would not materially reduce air pollution from old commercial vehicles, such as trucks, buses, tempos and three-wheelers. So, these need to go off the roads if air quality is to get better. Original equipment manufacturers could be mandated to put in place state-of-the-art scrapping yards. They should absorb the cost of disposal. The “polluter pays” principle could be legitimately extended to mean that the manufacturer pays for the final disposal of the product after its useful life is over. This would lay the foundation for moving towards a sustainable circular economy.

An attractive rebate, above the market price, for trading old commercial vehicles for new ones would have a major impact on air pollution. Germany ran a very successful similar “cash for clunkers” programme to mitigate the slowdown in their auto industry following the global financial crisis in 2008. The cash rebate could come from the additional GST revenue flowing from the higher production and sales of these vehicles due to the trade-in scheme. The impact on the fiscal deficit would at best be marginal. In addition, an announcement that after three years these vehicles will not be allowed to run, but will have to be scrapped, would be enough to ensure full replacement of the old fleet. This would be a fairly substantial stimulus for the auto sector. The impact on air pollution would also be significant. In the smaller North Indian cities where highly polluting tempos are the only means of public transport, the improvement in air quality would be immediate.

If there are good projects in the infrastructure space, bidding some of them out for construction and maintenance on an annuity basis would spur economic activity

There are a large number of stressed assets and bad loans arising from incomplete power and housing projects. The credit or financial institutions can take control from promoters by converting debt into equity. Thereafter, their speedy completion can be fully financed without any fear of aspersions. The resumption of work in these thermal power plants and housing projects, and their early completion, would provide another large stimulus to the economy. This would not need any budgetary outlay. The creditor public sector financial institutions would find, after completion of these projects, that the resulting write-offs would be far lower than that entailed by the National Company Law Tribunal route of bankruptcy proceedings.      

Housing and related infrastructure has a large multiplier effect in generating demand for upstream industries such as cement, steel and electrical equipment. Since the economic reforms, the state housing boards and urban development authorities have gradually vacated the housing construction space in favour of private developers. These agencies could take up affordable housing projects of the kind that they used to in the past. Provision of land for such institutions by state governments and public institutions at affordable (not market) rates would be necessary. This would also be a lot easier, as the land is not going to private developers.

A large housing programme for middle and lower income groups would not need any budgetary support. Institutional finance should be able to support the programme, where the normal practice has been for customers to make payments in instalments linked to progress in execution. It would, however, need considerable administrative effort to provide land at below market rates for projects in cities across the country.

In the infrastructure space, if there are good projects, having land and clearances, bidding some of them out for construction and maintenance on an annuity basis would also boost economic activity. The payment liability for these projects would start after they are completed. A significant part of railway modernisation could be undertaken through annuity projects. The road sector was able to regain momentum after it took up the hybrid annuity model of execution.

The energy sector also offers possibilities. The speed of the switchover to electric mobility would depend on the rapidity with which the public charging infrastructure for electric vehicles, from two-wheelers to three-wheelers, cars and buses, is rolled out. The lower GST rates now introduced would make a real difference only after the charging infrastructure is in place. The oil companies are cash-rich and can be directed to create the infrastructure. Electricity distribution companies can also be directed to do so, with the investment being accepted for tariff determination by the regulatory commissions. Bringing in the distribution companies is required for creating charging stations for personal cars and two-wheelers in parking places in residential areas.

The economics is now clearly in favour of electric vehicles and they will take over market share rapidly from conventional vehicles once charging facilities are provided. Government directives about phasing out conventional vehicles will not be needed. Energy Efficiency Services Limited could also attempt to replicate its success story with LEDs and try to replace all the energy-inefficient pumps presently in use with efficient ones through bulk procurement for urban water supply undertakings, industrial clusters and farmers in partnership with distribution companies. Bulk procurement would result in lower prices. Some concessional financing could also be provided.

A stimulus to generate demand for domestic goods and services is imperative to reverse the slowdown. This can be done without compromising on fiscal rectitude.   

The writer was Secretary, DIPP, and is currently Distinguished Fellow, TERI