Fiscal stimulus, in the form of increased government spending and/or tax cuts, is typically deployed to revive a sagging economy. The Indian economic situation today is more dismal than it was at the peak of the global financial crisis in 2008-09. GDP growth fell to a 10-year low of 5 per cent in 2012-13 and a tepid revival to around 6 per cent is projected for 2013-14.

Is it time for another fiscal stimulus to lift growth?

I do not think so, for two reasons. First, we do not have fiscal space for another stimulus. Second, the current economic slowdown cannot be attributed to lack of fiscal stimulus but rather to absence of reforms, slow decision-making and heightened governance issues. Let me elaborate.

Discretionary stimulus as well as some populist moves on the expenditure front did stimulate growth during the peak of the Lehman crisis. But these measures also pushed the fiscal deficit to 6.5 per cent of GDP in 2009-10, placing Indian public finances on an unsustainable trajectory. This led the Kelkar Committee to remark in 2012 that “The Indian economy is presently poised on the edge of a fiscal precipice, making corrective measures aimed at speedy fiscal consolidation an imperative necessity if serious adverse consequences stemming from this situation are to be averted in an efficient and timely manner”.

It is well understood that a loose fiscal policy focused on raising consumption expenditure generated excess demand and that triggered inflationary pressures.

The RBI too has noted that high fiscal deficits had inflationary consequences and were one of the factors restraining the central bank from lowering interest rates.

Responding to this concern, the fiscal deficit was brought down to 4.9 per cent of GDP in 2012-13, mainly through expenditure cuts.

Despite this, India’s fiscal deficit and debt levels remain high. Also, the Finance Ministry intends to scale down the deficit in a gradual manner. So it would be near-impossible to introduce another round of fiscal stimulus without creating macroeconomic imbalance. Moreover, now that inflation is showing signs of cooling, another round of fiscal stimulus to stimulate growth could have inflationary consequences and should be resisted.

The second issue relates to the factors responsible for the current growth slump in India. The slowdown is largely the result of homegrown policy issues; hence, fiscal policy cannot offset them to lead the economy to a durable high growth trajectory.

A sustainable economic turnaround requires an improvement in private investment climate, which depends on successful resolution of mining rights, land acquisition, environmental clearances, and swift action by the Cabinet Committee on Investments. These are beyond the purview of fiscal stimulus.

(The author is Chief Economist, Crisil.)

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