Is fiscal stimulus stimulating enough for the common man?

Chitra Grace Marion
30 Sep 4 minutes

Do you really think that the government should work on enhancing fiscal stimulus and will overshooting its fiscal deficit target for the same be a prudent decision?

Wait!

Don’t worry, the intention is to ‘not’ bombard you with jargons and make the already complex pieces of news more complicated for you. Let’s break down this buzzword – “fiscal stimulus” and see what it means and implies for the common Indian.

Let’s simplify and understand ‘fiscal stimulus’ through an analogy.

Say, one evening you get back home to find everyone in your family stressed out for various reasons – the lady in the house is unable to focus on her day job or on the chores, the kids are not playing as usual, the oldies are just staring out of the window. You know your family desperately needs a break, but you don’t have the money to pay for a vacation; what do you do?

Simple. You plan a trip and spend through your credit card. After all, money can be repaid later but it is important that the family freshens up and returns refreshed enough to be productive all day.

Fiscal stimulus is something similar where the government, during a slump, decides on a few steps to reinvigorate the economy. In most cases, the government chooses to spend more (public expenditure) to increase employment, redistribute income and to drive consumption.

A higher consumption demand is a signal enough for companies to increase production which in turn would lead to higher employment and again, higher consumption. So, fiscal stimulus is basically a trigger action by the government to spur economic activity.

Why would the Indian economy need such a fiscal stimulus now?

The Indian economy can be likened to a four-wheel car. The four wheels are private capital expenditure, consumption, exports and public expenditure. As of now, the first three wheels have deflated to a good extent; onus lies on the fourth wheel – public expenditure to drag the car along till the next air-pumping station (economic revival).

The government has two options now – one of which is highly unlikely to happen

The government may choose to offer fiscal easing where tax rates are slashed to hand over more disposal income to the population and spur consumption-driven growth. However, the government will have to wait at least till the next budget before announcing amendments to the direct taxation and with GST in place, subsidizing indirect tax would be quite a challenge.

Given the political and economic scenario, reducing rates on petrol looks like the only way ahead in this type of easing.

The second option, which is a likely one, is that the government may choose to increase public expenditure as to activate growth as explained above.

Fiscal stimulus comes along with its own set of challenges

As is, the tax collection is not sufficient to support the government’s spending. In such a case, the government may borrow from the open market to execute its fiscal stimulus program. Now, what can happen next is an interesting phenomenon known as the crowding out effect. The crowding out effect simply refers to the event wherein the government borrows so much from the open market that when India Inc. needs money for expenditure to cater to the redistribution-induced demand, the markets would not be left with much money to lend.

The second concern would be that such a consumption-activation measure would increase inflation as demand, quite often than not, increases faster than supply. This may not be a very favourable phenomenon, especially after RBI’s long struggle to bring inflation within target range.

Key Takeaways

The good part

The challenges
·         Spur in economic activities ·         Higher inflation
·         Increased employment ·         Lesser credit availability to companies
·         Redistributon of income ·         Pressure on fiscal deficit
·         Increase in general standard of living ·         Leakage from tax revenue

 

NEWS FLASH: PM Narendra Modi launches Saubhagya Yojana which aims to provide electricity to all homes by December 2018.

Is it the beginning already?

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