For growth to bounce back, and bank lending to restart, both consumer and business confidence need to recover, and that requires a big dose of fresh reforms.
MATHEW JOSEPH
Senior Consultant, ICRIER
“The stimulus will not raise first-half growth to beyond 4%. Getting even 6% for the full year means doubling in the second half — that’s difficult ”
IMF’s WEO Update in early November 2008 stated that the present crisis has made the economic outlook “exceptionally uncertain” and predicted a decline in world growth to just over 2 per cent in 2009. The Fund recommended further fiscal stimulus and monetary easing by countries and noted that “fiscal stimulus can be effective if it is well targeted, supported by accommodative monetary policy, and implemented in countries that have fiscal space.”
Following the implementation of stimulus packages by several countries, India is also moving in the same direction. With the moderation of inflation, monetary policy changed gear and became loose since mid-September. The central government announced a fiscal stimulus package in early December involving a fiscal burden of Rs 30,700 crore. Recent data has validated a deeper worsening of the economy. The deterioration of the economic outlook has now prompted the government to announce a second economic stimulus package combining fiscal, monetary and structural measures on January 2, 2009.
While all these measures appear to add up to a good package, monetary easing may be the only one in it which has some positive impact on the economy. The other measures may not make much difference to GDP growth in the current year and even for next year. The easing of ECB and raising of the cap for FII investment in corporate debt may not lead to availability of funds for Indian companies with the frozen state of international credit markets continuing. The ability of the central and state governments to spend the extra amount allocated in a targeted and effective manner is doubtful. The stimulus package will not change India’s growth prospects from the 4 per cent in the first half of 2009-10 which is predicted by some of us (see The global crisis and India’s growth rate by Rajiv Kumar, Mathew Joseph and Karan Singh, Business Standard, December 3, 2008). To reach even a 6 per cent growth for the full year, will require a doubling of the growth to 8 per cent in the second half of 2009-10, which may be difficult.
The basic problem is the shattering of business and consumer confidence which has led to a virtual freezing of additional business investments and consumer spending. The government’s stimulus package may not change this. On the other hand, the sharp reversal of the steady fiscal improvement over the years with a combined fiscal deficit of 8 to10 per cent of GDP this year could impair confidence. A better response to this unprecedented crisis is, the oft-repeated and now become cliché, to “kick-start the second round of reforms”. This involves a vast improvement of India’s “licence and permit” system by carrying out regulatory reforms. India ranks very low among countries on regulatory environment with regard to enforcement of contracts, payment of taxes, business closure, licensing, property registration and setting up of business as shown by the World Bank’s business surveys. Reforms in these areas will go a long way in restoring business and consumer confidence.
(The views are personal)
DR AJIT RANADE
Chief Economist & President, Aditya Birla Group
“The fiscal stimulus is much smaller than that in China/US, but then India is also not in dire need of lifesavers ... Reviving GDP needs a lot more”
The economic crisis has produced many medical metaphors. First the patient was suffering from severe dehydration (liquidity drying up), then there was pneumonia (credit freeze), and now doctors fear that patient may be in a coma (recession, depression). Emergency injections of saline and glucose (monetary and fiscal infusion) are being attempted to revive the ailing entity. But the old Doctor Keynes has warned that monetary medicine does not work when there is complete collapse of confidence and trust.
The only effective remedy, to be administered in large and urgent doses, is fiscal. That too cannot be merely tax cuts. It has to be spending, which translates into building new infrastructure, creating employment and strengthening safety nets.
Even though India is not like its Western peers, as a patient in dire need of lifesavers, the doctors here have responded well and in a timely manner. Since August, the RBI has injected nearly Rs 400,000 crore of liquidity into the economy. That has brought down rates and yields, but has not really triggered more lending to small and medium enterprises. It has however helped substitute for the disappearing dollar funds, and hence not led to fresh inflation. The relaxation of ECB curbs is also helping the asset-financing of NBFCs and real estate (townships) developers who were hitherto blacklisted.
On the fiscal side, excise cuts should eventually reach the consumers in lower prices. The much-needed help to exporters will hopefully reverse the shock of export shrinkage in October and November. Safeguard and anti-dumping duties are also needed to counter the surge of desperate imports. After all, cheap dumped imports are fickle, and imports don’t create jobs, but exports do.
The actual magnitude of fiscal spending is less than 2 per cent of GDP compared to promises of near-ten percent in the US and China. But unlike the latter, India’s spending is immediate. The extra borrowing room approved for state governments should also help fiscal expansion at the state level. There are many nuts and bolts in the fiscal framework (e.g. removal of export duties, accelerated depreciation for commercial vehicles, etc) which will help. Expenditure push through IIFCL is welcome.
The most potent infusion that we need beyond monetary and fiscal stuff, is a medicine to revive consumer and business confidence. Otherwise all the rate cuts cannot add up to more bank lending. The banks have to see and feel business outlook improving. India’s growth is much less dependent on world growth, than on domestic animal spirits. Demography and domestic orientation are favourable factors. The government’s fresh fiscal offensive is heartening, but must also now be accompanied by a strong dose of reforms. That would certainly get the patient out of the emergency room.
