Put money into people

Photo: Graham Crouch/Bloomberg via Getty Images

Put money into people's hands Mr Jaitley. It will work

The question of a stimulus

  • Arun Jaitley is looking at spending more to boost the economy
  • The finmin is moving away from the preoccupation with fiscal deficit

What experts say

  • Some economists want the focus to stay on capping deficit
  • But many feel there's need to stimulate the economy

More in the story

  • Which are the areas where the govt should spend?
  • What about inflation?

Finance Minister Arun Jaitley has said his government will increase public expenditure to boost the economy. This means that the government is looking at relaxing its fiscal consolidation target in the next financial year after slashing allocation for several welfare proogrammes in the last budget.

The mid-year economic review by Chief Economic Advisor Arvind Subramanian rooted for both a monetary stimulus (by relaxing interest rates) and a fiscal stimulus (by increasing public expenditure) to sustain economic growth.

Also read: Growing economy, failing agriculture: why this is a disastrous mix for India

Looks like Jaitley has accepted the advice. He did not have much of an option though, given that new private sector investment proposals nosedived 74% to Rs 1.05 lakh crore (September-December).

Why stimulus?

The announcement to increase public expenditure was cheered on by some economists. For others, it was a tacit acceptance of the fact that the Indian Economy was not growing at more than 7%, as projected by government data.

"What is the need of giving a stimulus for the world's fastest growing economy?" asks Ashok Desai, former chief consultant for the finance ministry.

"The finance minister had set a target of capping fiscal deficit at 3.5% for 2015-16. Why does he want to retreat from that? The stimulus is nothing but dole-outs to supporters of the government."

For those like Desai, fiscal consolidation is more important for the economy in the long run. However, others think that there is no other way but to pump in money into an economy suffering from lack of demand.

Damn the deficit

Rajiv Kumar, senior fellow at Centre for Policy Research, believes the government should follow the Keynesian model of giving more money into the hands of people to create demand.

"The finance minister would do well by not bothering too much about fiscal deficit. Demand in the Indian economy has collapsed. The nominal GDP is just 6.8% against the estimated 11.15%. So the government needs to create demand in the economy by pumping in money," he says.

Also read: Declining exports, few jobs, falling rupee: Is this 7.5% growth, Mr Jaitley?

The Indian economy is suffering from a plethora of issues, including falling exports, job losses and low consumer demand.

According to Reserve Bank Governor Raghuram Rajan, as much as 30% of the industrial capacity is lying idle.

Losen the purse string

Pronab Sen, who chairs National Statistical Commission, says in the absence of global demand, the government needs to find out which sectors have the capacity to generate jobs as well demand. "The construction sector can do that job for the government as construction activity has a multiplier effect on job creation as well as consumption. If the government spends more on building highways and rural roads, it will generate employment," Sen says.

The 2015-16 financial year has really been bad so far for the construction sector. A lack of real estate demand pulled down the sector. Growth slowed to 2.6% in the July-September quarter from 8.7% a year ago, according to data released in December. In the six-months from April to September, growth slowed to 4.7% from 7.6 %.

According to Sen, even though the government has spent a good amount on roads and highways, it needs to step up expenditure on such projects to generate jobs.

Turn to MGNREGA

A major reason for poor demand in the Indian economy has been the rural distress due to two years of drought.

So far, 10 states have declared a drought, seeking around Rs 38,000 crore in compensation from the Centre.

The government should ensure an early assessment of the drought-hit areas and release the money at the earliest. According to Ashok Gulati, an agriculture economist, the time taken in compensating the farmers in case of a drought is too long to control damage.

Also read: China unleashes a bear: stock market crash a risk & an opportunity for India

"The money reaches the farmers after three to five months and even that is not enough," he says. The government would do well to release money on time this time so that the farmers regain their purchasing power to some extent.

Sales of tractors have fallen 23% this year. Sales of motorcycles - mostly sold in the rural market - declined by 2.57% in April-October.

Sen, believes that more than the urban, it is the rural economy that can give a push to the GDP of India. "If we give more money into the hands of the rural population, they will buy more non-durable products. MGNREGA can do that job for the government," says Sen, advocating for an increased in expenditure under MGNREGA (Mahatma Gandhi Rural Employment Guarantee Act).

The rural development ministry has already said to have spent its budgetary allocation and Minister Birender Singh sought an additional Rs 5,000 crore from Jaitley for the scheme to meet the increased demand for jobs.

What about inflation

A government stimulus often leads to an increase in inflation. In 2009, when the then UPA government gave a farm loan waiver of about Rs 70,000 crore and increased spending under MGNREGA, it led to double-digit inflation growth in the country.

There is a possibility of high inflation making a come back in case of a stimulus. But should it be reason for the government to not increase public expenditure?

"Between an economy with no jobs and an economy with high inflation, one should choose the latter. The finance minister should think about giving money to people. Other things can be managed once the demand becomes sustainable," Kumar says.

Also read: BRICS economies are in a rut. Is it time for India to go it alone?

Neeraj Thakur

Neeraj Thakur @neerajthakur2