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Time to splash the cash

Attempts to unfreeze credit have been restricted to opening ‘refinance’ windows wider. Again, the money the Govt is releasing is taking inordinately long to reach the end-user, be that exporters, real estate companies or small enterprises.

india Updated: Dec 14, 2008 22:35 IST

Industry has just sent our policy makers the loudest wake-up call yet in the ongoing economic crisis. A quarter of the economy wobbled in October, with manufacturing output shrinking by 1.2 per cent. The pain is widespread: consumer goods declined by 2.3 per cent and intermediaries by 3.7 per cent while capital and basic goods notched up some gains. Because demand impulses flow from consumer to basic goods through intermediaries, the extent of demand destruction on display is awful. The picture is deteriorating fast, wonks believe the chill has spread wider on the factory floor in November and if the trend carries beyond December, Indian industry will be well on its way into the officially accepted definition of a recession. And while we do not compile monthly data for service industries, the predominant anecdotal evidence suggests the sector, which accounts for around 60 per cent of the GDP, is faring no better. Airline travel is down, tourism is in a slump and financial services are being knocked around.

Policy prescription in such a situation is straightforward: spend your way out of the slowdown. The government's $6 billion stimulus package announced last week attempts to do that, but seems a puny effort at reviving the $700 billion that Indians consumed or invested last year. Tax cuts are a good idea but the wait for lower excise duties to work their way through the system could turn out to be costly. The effects of a cut in direct taxes, on the other hand, are far more immediate apart from being immune to producers' decisions to pass on duty reductions to the consumer. The government till last week was, however, not entertaining the notion. Worth a thought?

Likewise, attempts to unfreeze credit have been restricted to opening ‘refinance’ windows wider. Again, the money the government is releasing is taking inordinately long to reach the end-user, be that exporters, real estate companies or small enterprises. Monetary expansion is accompanied by the unedifying spectacle of the government having to ask banks to lower rates. Transmission loss, perhaps?

Having yielded the commanding heights of the economy to private players, our policy makers need to better appreciate that if we have to spend our way out of this crisis, corporate India and the ordinary household are a better bet than the government. Recovery lies in enhancing their spending power, principally through tax cuts and cheaper credit. ASAP.