Contact Your Financial Adviser Money Making MC
26
September 2017
 |
PM Modi (The Total Investment & Insurance
Solutions)
It
is almost a certainty that the Indian economy will receive a fiscal stimulus
soon on account of the government's desperate attempt to reverse the country's
dipping growth rates. The Total Investment & Insurance
Solutions
Throughout
history, the Keynesian solution of taking the fiscal route to stimulate the
economy when the monetary one is exhausted has proved to be quite effective. It
is indisputable that the idea had an indispensable role to play in extricating
the global economy out of the Great Depression of the 1930s and also the more
recent crisis of 2008. In the latter case, there was a part of the developed
world, such as the UK and the Netherlands, which tried the opposite by
practising austerity, but the countries that intentionally ran large fiscal
deficits like the US and China managed to weather the crisis better.
There
is now a consensus among post-crisis empirical studies that fiscal stimulus has
a positive effect on the economy. Therefore, the Indian government might also
find some reprieve from adopting a similar approach. However, there are quite a
few issues that should be kept in mind before going ahead with the move. The
Total Investment & Insurance Solutions
First
and the most obvious concern is of deviating from the path of fiscal
consolidation. India has had the widest budget deficit in Asia and the
government has done a good job of committing itself to pre-decided goals of
reducing this each year. In fact, achieving macro-economic stability has been
one of the biggest achievements of Prime Minister Narendra Modi's government.
However, this year's budgeted deficit is 3.2 percent and the government has
already exhausted 92 percent of the annual target in the first four months
(April-July) of the current fiscal. The Total Investment & Insurance
Solutions
Even
though Finance Minister Arun Jaitley has promised to find a balance between
fiscal prudence and spending, any stimulus package that the government
announces needs to be introduced with commensurate revenue streams or risk
breaching the fiscal commitments. Any deviation from the fiscal consolidation
roadmap will have serious long-term repercussions that will be costlier for the
country than a gain of a few percentage points over the course of the year. The
Total Investment & Insurance Solutions
There
also exists the risk of a loss of credibility of the government's commitments.
A lack of trust among economic agents simply escalates the costs of economic
transactions and makes public policy harder to implement. Then, India will run
the risk of being downgraded by international credit rating agencies if it
fails to meet its fiscal commitments. Global investor sentiment will also be
hurt in such a scenario and due to a combination of the last two factors,
foreign inflows of money will be negatively impacted. Therefore, sacrificing
fiscal consolidation at the altar of growth might end up hurting growth itself
in the long run. The Total Investment & Insurance
Solutions
The
second issue that needs to be taken into account is the impact of the
newly-implemented Goods and Services Tax (GST). For instance, as GST tax credit
claims escalate, government finances would be drastically affected. Since the
full impact of the GST's implementation is still unclear, a margin of error
should be allowed in the fiscal calculations so that there is no shortfall
towards the end of the year. The Total Investment & Insurance
Solutions
Third,
the US Federal Reserve has signalled its intention to unwind its massive
bond-buying programme and India needs to brace itself for its impact. Although
India has sufficient reserves to manage any large-scale outflow of money due to
the Fed's decision, uncertainty will still reign supreme and giving up fiscal
restraint at the moment will be quite irresponsible.
Thus,
although a fiscal stimulus might be a good idea, abandoning the practice of
fiscal consolidation is not. Also, the quality of the fiscal stimulus matters
quite significantly. Running deficits without creating productive assets only
burdens future generations with higher debts. On the other hand, high-return
public investments more than pay for themselves and improve the well-being of
future generations. So, apart from ensuring that the fiscal targets are met
despite the stimulus package, its quality also needs to be ensured.
As
pointed out in last week's column, the banking system should be the first line
of attack of the fiscal arsenal. Boosting the credit offtake of the economy will
go a long way in kickstarting lending activities and hence private investment.
Since desperate times call for desperate measures, recapitalisation of banks
can be a possible option to consider. The Total Investment
& Insurance Solutions
Next,
in the spirit of leaving future generations with lucrative assets along with
handholding the economy out of the current mess, the fiscal stimulus can have a
heavy focus on infrastructure spending. This can also help in mitigating the
unemployment problem that is also ailing the economy.
Finally,
along with these short-term measures to revive the economy, the government
should not shy away from long-term structural reforms, especially in land,
labour and agricultural markets. The slowdown is popularly blamed on
demonetisation and GST, but the growth figures clearly show that the trend had
set in much earlier. This points to a deep-seated problem within the Indian
economy that goes beyond the temporary shocks that it has received. Considering
all these factors, the government is in a completely unenviable position
currently. In Shakespeare's wise words, uneasy lies the head that wears the
crown. It remains to be seen how well it manages to handle the crown.The Total Investment & Insurance Solutions
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