The Hindu Business Line : Stimulating economy, the Australian way

Recently in Canberra As the global economy is heading for a possible recession with countries taking up stimulus measures to revive demand and generate economic activity, India too has joined the bandwagon with the Union Finance Minister, Mr P. Chidambaram, declaring that the “time is right to stimulate” the economy.

While the stimulus announced by New Delhi in the wake of the world’s worst financial crisis largely pertains to providing lendable resources to the banking system by re-jigging the policy rates through the monetary route, some of the countries have plumped for a slew of spending measures through public expenditure so that such sections which do not have the spending capacity are provided with the wherewithal to spend their way to provide the much-needed boost to activity in the economy.

Rate cut

Though by and large immune from the recessionary forces gripping the global economy now, Australia was in the forefront in taking precautionary steps.

A group of Indian journalists who were in Australia when the global financial crisis was at its acme read the Australian Reserve Bank’s sharp interest rate cut in the second week of this month and the Federal Government’s resolve to guarantee bank deposits and inter-bank lending and the Labour Government headed by the Prime Minister, Mr Kevin Rudd’s massive $10.4 billion fiscal stimulus. This big stimulant, designed to nudge the economic accelerator, is roughly equivalent to one percentage point of Australia’s trillion dollar economy.

The one-off benefits are targeted at scores of millions of people on low and middle incomes — pensioners and families with dependent children — at the crucial pre-Christmas time when most would be spent swiftly on gifts, festivities and local holidays.

Controversial tax

Alongside these stimulus measures, there were also reports that the Australian Treasurer, Mr Wayne Swan, has hinted at plans to abolish the 10 per cent interest withholding tax on foreign investors buying state government bonds could come into effect in ‘coming weeks’.

This way, the Australian Federal government has proposed to unlock $80 billion to fund critical projects by advancing plans to scrap a controversial tax on state government borrowings as part of its reforms to stabilise the financial markets.

This follows alarms by some state governments that the delay in legislating for the tax cut has warped the market by reducing demand for their bonds.

This would cut the costs to the states of financing ambitious plans, besides addressing a huge infrastructure shortfall and rendering it easier to tap into international funds when the States have already pitched more than $235 billion worth of projects seeking federal fillip to Infrastructure Australia.

Thus, at the moment, fiscal and monetary policies work in the same direction in Australia to revive activity and ensure that recession does not hit the economy.

Safe havens

In contrast, in India, all the measures that have been announced in the wake of the global meltdown of markets, both financial and bourses, were tailored by the monetary authorities to make banks left with sufficient capital to keep the economy well-oiled in terms of extending commercial credit and consumer credit at affordable rates.

But all these sound well on paper but in practice, banks, particularly public sector banks, have yet to shed their coyness for lending to consumers and trade and industry, though they take pride in parking their funds in safe havens in government securities and other less-risky investments.

As the Australian authorities have demonstrated that in bad times it is the government which should show up public expenditure in abundant measures to inject not only liquidity into the system to enable people spend but also infuse confidence that it has intervened in the business cycle to iron out its peaks and troughs.

That what prompted John Maynard Keynes to pioneer the pump-priming idea by the authorities since the economic cycle was largely driven by the ebb and flow of aggregate demand in the economy.

Forex reserves

Since in India private sector investment always follows public investment, it is time that the Finance Minister mulled over reprioritising his expenditure budget towards providing more public work programmes and putting in place a raft of tax relief measures to industry and States so that they would get investment and be left with funds to fend for generating activities across the economy and providing employment to legions of people, policy analysts say. With foreign exchange reserves of $ 274 billion as on October 10, using these reserves for infrastructure and productive purposes within the country makes sense at this juncture, instead of realising meagre returns in parking them in developed countries’ treasuries.

The first batch of supplementary demands for grants for 2008-09 approved by the Lok Sabha, though entails a total cash outgo of Rs 1,05,613.38 crore with 99 per cent on 13 major items, such as fertiliser subsidy, Sixth Central Pay Commission arrears and disbursal of bonus due to enhanced bonus ceilings, farmers debt relief fund, National Rural Employment Guarantee Scheme, foodgrains subsidy and additional Central assistance, including loan component to States, is far too small to cover only a few segment of populace, leaving the larger constituency of rural and poor people suffer the deficiency of demand.