A cooling economy can be nursed back into health in one of two ways, depending on how deep you think the malaise is. A big-bang spending programme can take up slack overall. That is the strong dose. Rearguard action to plug the sectors leaking most will suffice if the condition is not as grave. The government, having chosen the latter, is sticking to its guns; the patchwork of selective spending and giveaways, it says, should be good enough for the 7 per cent it sees the economy growing this year. Given the fiscal straits New Delhi finds itself in, however, it is tempting for observers to mistake parsimony for prudence.
Small doses, administered correctly, would have been unexceptionable. Consumption by households and investment by companies are coming off blistering trajectories and policy should have been designed to keep these fires stoked. More thought could have been applied to tax transfers that increase disposable incomes. Doors needed to be opened wider for long-term capital investment, although the impact of the measures undertaken will not be clear till the foreign investor acquires a renewed interest in the India story. The skew towards government spending, on the other hand, runs the risk of getting mired in official inefficiencies. And the tax incentives do not seem to have stirred much of the animal spirits in the rest of the economy. The window for fiscal stimulation having closed in an election year, any further counter-cyclical expansion, if needed, will devolve on lower interest rates. The latest cuts by the Reserve Bank bring its overnight interest rates below weekly wholesale inflation, which, in turn, is trending down rapidly to create more space for monetary expansion. The problem with one-sided bets on falling interest rates is that they create a perverse incentive for banks to park their money in gilts and shore up their bottom lines. Going forward, the challenge will be to free the money trapped within the banking system.
Beyond the debate over the quantum of solace on offer lies the bigger qualitative issue of our style of economic management. The bailouts could have been accompanied by reforms that would have run into less trenchant opposition during a crisis. An overhaul of the maze of foreign investment regulation is a prime example. That is one opportunity we seem to have completely missed.