According to Planning Commission, Deputy Chairman Montek Singh Ahluwalia, the value of the UPA government’s fiscal stimulus does not lie only in the numbers but also in the psychological boost it gives to pump up circulation in the economy. But the package of Rs 34,000 crore — 0.6 per cent of the GDP at market prices — announced on Sunday is rather insufficient to address the problem of a fast-slowing economy whose growth may decline to 7 per cent this financial year and 6 per cent in 2009-10.
A stimulus package typically entails higher public investment in building roads, seaports, airports, power and other infrastructure to generate employment and boost 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. This package also will bolster the confidence of entrepreneurs and improve the investment climate in the economy.
How much of a stimulus can restore India’s growth by one percentage point, back to, say, 7 per cent per annum? Capital spending of Rs 160,000 crore — 3 per cent of the GDP — to generate 1 per cent of GDP growth, assuming an average capital-output ratio of 3:1. This is five times more than what the government announced! However, all of this increase need not be in the form of public investment or budgetary resources. The sad truth is that the government is living way beyond its means.
But given the compulsion to create the necessary fiscal headroom for reflating a faltering economy, the government could easily have reduced subsidies and other wasteful revenue expenditures. The fertiliser subsidy alone accounts for a bulk of its revenue deficit that is incurred when tax revenues can’t meet expenditures, forcing the government to rely on borrowings. The government could easily have diverted Rs 80,000 crore — 1.5 per cent of the GDP — for its package without incurring higher budgetary deficits.
As for the remaining Rs 80,000 crore, the government can leverage the necessary resources like it has done by permitting India Infrastructure Finance Corporation to raise Rs 10,000 crore through tax-free bonds and leverage double that amount to refinance bank lending for infrastructure projects. A booster dose of 3 per cent of GDP will certainly help revive growth.
The big question is whether the government has the political will to do the needful.