It’s time to go public

As the world economy hovers on the brink of a nasty, brutish and prolonged slump, there is no doubt that a coordinated global fiscal stimulus is what is urgently needed, writes N Chandra Mohan.

As the world economy hovers on the brink of a nasty, brutish and prolonged slump, there is no doubt that a coordinated global fiscal stimulus is what is urgently needed. Fear and panic have gripped stock markets in a bear hug. Investor confidence is low. The ranks of the jobless keep rising by the day. Nothing can dispel these blues and restore global growth more than a massive dose of public spending by the major economies of the world. The big question is whether there is a sense of urgency to act expeditiously.

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A step-up of public investment in building roads, seaports, airports, power and other infrastructure generates employment and boosts aggregate demand. This measure is considered an ideal counter-cyclical measure — rising when the economy is weakening and falling when the economy is strengthening — to revive flagging growth. A global fiscal stimulus will also rekindle what economist John Keynes wrote about the “animal spirits” of entrepreneurs and improve the overall investment climate.

While such a stimulus package is imperative, the sad reality, however, is that only a few economies are seriously working to put their less ambitious plans in place. Japan proposes to spend $275 billion but has put off the required legislation until next year. Germany modestly intends to invest $15 billion over two years. France’s President Nicolas Sarkozy has doubled that to $32.9 billion but is far more comfortable railing against the ills of financial capitalism.

All eyes are on the package being worked out by US President–elect Barack Obama’s team to create or save 2.5 million jobs by 2011. Indications are that this package would identify those investments “that stimulate demand in the short run and have a positive impact on productivity. These include renewable energy technologies and the infrastructure to support them”, wrote Lawrence Summers, director of the National Economic Council, in Financial Times.

The prospects of a fiscal stimulus in China and India are equally disappointing. Faced with a sharp deceleration in growth to 7.5 per cent next year, the lowest in 19 years, China announced a bold programme to spend 4 trillion yuan or $586 billion. This package is four times of what America announced earlier this year. But China is yet to indicate a roadmap of how this 4 trillion yuan will be spent.

The dragon’s overall package includes tax reform, social welfare and public works in building houses for poor families and infrastructure projects. The last-mentioned accounts for half of the total or $300 billion. The big question is, whether this order of spend is adequate to ensure that China’s growth will increasingly depend on domestic drivers rather than being export-led as was the case till the global economic crisis struck this year.

Perhaps inspired by China’s example, India’s Prime Minister Manmohan Singh disingenuously claimed that a fiscal stimulus plan was already in place in the populist union budget for 2008-09 announced last February! As he had anticipated a global slowdown, he indicated that the government had taken excessive risks with regard to the budget deficit this year. The government had, in fact, budgeted for a very substantial amount of deficit precisely to take care of the slack that might emerge, he added.

As is well known, India’s budgetary package includes a waiver of farm loans benefiting 36 million farmers, a national rural employment guarantee scheme, besides many other welfarist measures. Higher public expenditures are also envisaged on education, health and urban renewal programmes. However, there is no provision whatsoever for building infrastructure like, say, revitalising the stalled national highways programme in order to boost overall economic growth. The sad truth is that India simply does not have the fiscal headroom for reflating its economy. The country is running a budgetary deficit that is at dangerous levels that got it into difficulties during the early 1990s. Such deficits pre-empt investible resources that can be utilised to pump prime the economy. Unless subsidies like those on fertilisers and other revenue expenditures are reduced, how will the UPA government raise resources for a Rs 50,000 to Rs 75,000 crore fund to build roads, airports and other infrastructure?

For such reasons, the much-vaunted fiscal boost to prop up India’s shrinking growth might well consist of tapping our foreign exchange reserves. The big question is the level of ambition involved. Will $10 billion suffice? Won’t $25 billion make a bigger difference? Such sums can easily be diverted from the forex kitty to help build power, roads, telecom etc. These reserves, in any case, are earning a paltry interest of 2-3 per cent while the return on building physical infrastructure is much higher.

But for all of this to kick in, the list of infrastructure projects to be funded must be finalised as soon as possible. Less than half of the 515 central projects suffer from delays. No new national highway projects have been awarded during July-December this year. India’s plans to step up public investments to revive growth cannot afford to founder due to procedural constraints such as these! To ensure that the economy returns to its earlier growth trajectory, a bolder stimulus plan cannot also be left to the incoming government next year. The upshot is that unless the major economies boost aggregate demand with a fiscal boost, a 1930s-type slump is inevitable.