The Hindu Business Line : Stimulating developments

It is to be hoped that China’s fiscal stimulus plan will induce the Finance Ministry to reconsider its reluctance to offer the fiscal step-up and get the Indian economy growing again, says S. VENKITARAMANAN.

Last week saw some interesting developments on the international economic scene. The most important of these is China’s pre-emptive move last Sunday announcing a fiscal stimulus package of nearly $586 billion for two years. This amounts to roughly Rs 29.3 lakh crore. It covers various areas of investment, such as low-cost housing, rural infrastructure, water, power, new technologies and projects to improve the environment and so on.

Obviously, the scale and details of the fiscal stimulus plan are mind-boggling. The authorities seem to have decided on this keeping in view the recent slowing down of the Chinese economy. Not for them the tinkering with various liquidity packages and rate cuts, although they have done some of that also. They have come to the conclusion that what matters on issues of growth is massive spending, either by the State or by corporates. Since corporates are constrained by various factors, China seems to have decided on a State-sponsored fiscal stimulus plan.

Spur from China

Obviously, this should be a stimulus to our own mandarins who are hesitating because of the Fiscal Responsibility and Budget Management (FRBM) targets. These are self-imposed limitations that should have little relevance when the question is one of stimulating growth, which is threatened not only by local factors but also by global developments. It is to be hoped that China’s fiscal stimulus plan will induce the Finance Ministry to reconsider its reluctance to offer the fiscal step-up and get the Indian economy growing again.

Some observers have pointed out that China does not maintain a clear distinction between banks’ financing and fiscal resources as such for public sector projects.

China’s State-owned banks lend liberally to State-owned construction firms and manufacturing entities. Some of these loans have lately become non-performing, which is, however, taken care by the State by recapitalising the banks adequately. This involves some questions as to how far China’s fiscal stimulus will cause strains to the Government’s fiscal balance.

It is, however, noteworthy that China has a sound fiscal situation and it should be possible for the Chinese State to accommodate the increase contributed by the stimulus, which is incidentally 7 per cent of GDP spread over two years. A similar attitude could be taken by the Indian Government also if it succeeds in eliminating inessential subsidies, such as those on petroleum product price. In such a case, our fisc will be able to accommodate, together with banks’ support, an essential fiscal stimulus programme such as China’s.

Expectations from G-20

China’s stimulus plan has come on the eve of the proposed G-20 Conference. This is in line with the ideas being put forward by statesmen of different countries asking for such a stimulus for the world as a whole.

The IMF itself has recommended such a stimulus. Influential members of the US Congress have already asked for such a spending plan. It is hoped that the President-elect Obama’s Adviser will also formulate and implement a bold plan on the lines of what President Franklin Roosevelt had implemented following the Great Depression.

In this context, questions have been raised about what the proposed G-20 Conference will achieve other than airing various thoughts about averting a global recession. European spokesmen have called for better regulation of financial entities. Brazil appears to have asked for a greater role for emerging countries in the governance of multilateral financial institutions.

In this context, it is significant that the Chief of the IMF, Mr Dominique Strauss-Kahn, had indicated in a recent interview in Washington that he has put the nations in the world on notice that they should not bank on a Bretton Woods II. He is of the view that the time is not appropriate for considering such radical solutions.

India MUST formulate its stance

While this may be a conservative attitude to the question of international financial architecture, it behooves the Government of India to formulate its attitude where issues of such global governance of financial institutions are involved. This is in line with what Dr Manmohan Singh himself mentioned at the Beijing Conference recently. At a minimum, there has to be a proposal for greater participation of the emerging nations in the management of IMF and the World Bank.

In a perceptive piece published recently, Dr Arvind Subramanian has remarked that the outmoded procedures of selection of the Heads of the World Bank and the IMF, which are today confined to a few developed countries, should be terminated.

Mr Strauss-Kahn’s arguments do not cover this issue. They rather reflect the elitist attitude of the developed countries, which want to preserve their hold on the management of these institutions. Our Prime Minister should be prepared to meet this argument frontally, if necessary by forming a coalition with China, Russia and Brazil.

Much will, however, turn on the conclusions regarding fiscal stimulus, which may be the only way to combat the threat of global recession. Such a recession is at present likely to snatch the hard-earned prosperity of millions of people in the world, particularly the populations of the emerging market economies, which are trying to escape the long history of poverty and deprivation.

China’s fiscal stimulus demolishes the light-hearted suggestions that infusion of liquidity and cuts in interest rates will be able to take care of the problem of declining demand in an economy, such as India’s. We hear of strains arising from lay-offs by proposed automobile, steel and other industries, which are the result of the fall in demand for products, namely, automobiles, construction materials, cement and so on.

Added to this is the problem of power shortage, which emphasises the need for higher investments in power generation. The shortage of infrastructure is demonstrated by the fact that our production plans have been imbalanced. It is essential that India announces its own fiscal stimulus plan, which should at least be on the same relative scale relating to our GDP.

Implementation is key

There are, of course, questions of funding and implementation. As far as funding is concerned, the Government has already initiated proposals for an infrastructure financing facility, which will use part of our foreign exchange reserves. This should be expedited. Similarly, proposals of public-private partnership should be encouraged. This may require courageous handling of issues regarding pricing and concession agreements.

The Dabhol experience confirms that public-private partnership, which involves foreign entities, may not be a preferred option. It is possible to induce the Indian private sector to participate in the mission, provided attractive tax concessions and pricing policies are put in place.

Above all, China’s fiscal stimulus plan will succeed because China has a record of good performance as demonstrated by its success in establishing world-class infrastructure. It has achieved success by putting in place rewards and incentives for its public sector employees. The same should be possible for India also. There are, of course, successes for India’s public sector also — witness Delhi Metro Project and Chandrayaan 1. It should be our aim to replicate these successes. A fiscal stimulus package for India will be as successful as its implementation. It should not come about that the Government is ready to spend and hence release funds, but the projects do not get completed properly and in time.

This will result in the stimulus losing its initial momentum and bring about a total waste. The task of the Government should be not only to introduce a stimulus but also to ensure that the stimulus gets implemented effectively in time and in the right spirit.

( blfeedback@thehindu.co.in)

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