The Hindu Business Line : Patchwork of a fiscal stimulus

The fiscal stimulus package has offerings woven together with little evidence of any larger design or purpose. Each of them hangs separately without any indication of the boost it will give to the economy. There is also no way of knowing from where and how the funds are going to be mobilised.

Mr Montek Singh Ahluwalia (right), Deputy Chairman, Planning Commission; Mr K. M. Chandrashekhar (centre), Cabinet Secretary; and Mr Arun Ramanathan, Finance Secretary… The various amounts under the stimulus package do not seem to flow out of any pattern of priorities the Government has in view to counter the slowdown.

B. S. Raghavan

The so-called fiscal stimulus with which the Government spokespersons have gone to town is actually a crazy quilt of disparate offerings devoid of any evidence of their having been woven together with any larger design or purpose. Each of them hangs separately without any indication of the boost it will give to the economy in specific terms in relation to exports, imports, production and growth in the various sectors.

There is also no way of knowing from where and how the funds of the magnitude mentioned are going to be mobilised.

‘Multidimensional package’

The Deputy Chairman of the Planning Commission, Mr Montek Singh Ahluwalia, instead of importing clarity into the understanding of the stimulus package, shies away from taking the country into confidence about the overall size of the stimulus since “putting one number to this package would not be the right thing to do”. All that he would say was, “This is a multidimensional package. This is a package that consists of some additional public expenditure, some incentives to channelise bank financing and others which are reductions in excise duty.”

These are all vague statements that only confirm the impression that the various amounts under the stimulus package do not seem to flow out of any pattern of priorities the Government has in view, which it considers to be relevant from the standpoint of countering the slowdown.

Let us take just two examples. A good part of the stimulus is supposed to come from a stupendous effort of taking the Plan and non-Plan expenditure in the next four months to the level of Rs 300,000 crore. But the Government provides no list of projects or schemes as to how precisely this expenditure is to be channelled.

Loading the Plan

On the plan side alone, the Government has envisaged the provision of an addition of Rs.20,000 crore, over and above the budget estimate of Rs 2,43,386 crore for the year 2008-09, to be spent in the next four months. Besides the absence of any clues as to the Plan heads or sectors for which the extra amount is earmarked, the stimulus package is also misleading in that it does not take account of the fact that the actual expenditure during the first seven months till the end of October has only been Rs 1,19,738 crore or 49.2 per cent.

With the balance of Rs 1,23,648 crore out of the original provision itself still waiting to be utilised, loading the Plan with another Rs 20,000 crore and hoping to spend a total of Rs 1,43,648 crore in the remaining period of the current year can only be on the presumption of some superhuman effort, the like of which has not been seen before.

Everything is contingent on how soon the Government will get the mandatory parliamentary approval for the increased provision, since any loss of time on this score will further eat into the impossibly short time available to make the stimulus yield some visible results.

Runaway deficit

Take another problem area inherent in the stimulus: It makes no allowance for the tremendous pressure to which the stimulus will subject the fiscal deficit, thereby in part nullifying the beneficial effects.

The various ‘stimulants’ of the package such as the across-the-board cut of four per cent in VAT, export and Customs duty concessions and full refund of service tax paid by exporters to foreign agents may well cause a loss of revenue of the order of Rs 10,000 crore or more.

Add to this the market borrowing of Rs 45,000 crore announced by the Government, and the fiscal deficit is all set to jump from Rs 1,33,287 crore (or 2.5 per cent of GDP) as estimated in the Budget for 2008-09 to Rs 1,88,287 crore or 3.6 per cent of GDP.

There is every chance that the deficit will exceed the amount shown in the Budget, considering that the deficit, as of October, has approached 88 per cent or Rs 1,19,738 crore of the budgeted amount. This means that unless there is an unexpected surge in the revenues or steep fall in expenditure to neutralise the excess — both contingencies being remote — the deficit may break loose and go beyond four to five per cent. And, if the additional Plan expenditure of Rs 20,000 crore entails additional market borrowing, it will push the deficit further to still greater heights.

Crying wolf

On the whole, the stimulus seems to have been born out of some nebulous thinking on what it will achieve. The Government and the Reserve Bank of India have gone on piling upon one another a series of measures apparently to ward off the contagion effect of the recession in the US, the UK and elsewhere, without really going into their appropriateness on a differential analysis of the conditions in India.

India Inc also have been crying wolf simply because of some shrinkage of exports here or contraction of credit there and also partly to capitalise on the opportunity to wrest as many financial concessions as possible.

With more than 60 per cent of India’s GDP being made up of domestic consumption, business and industry could have looked into the prospects and possibilities of revving up the volume, velocity and variety of economic activities within the country to make up for whatever temporary disturbance to the established or accustomed order of things they are facing until the external situation stabilises.

Expanding customer base

For instance, there is plenty of scope to give a boost to the bottomline as also the economy in the bargain if only the captains of industry and the Government earnestly explore, and plough resources into, hitherto inadequately explored avenues such as adding to the installed capacity of non-conventional and renewable sources of energy, intensification of production and distribution of handicrafts and handlooms, processing of fruits and vegetables and marketing the finished products — areas which former President Abdul Kalam had been constantly stressing as part of his vision for enabling India to break out of the present constricting mould.

This will also help in vastly expanding and extending the customer base.

The hardy corporate chieftains owe it to themselves and the country to demonstrate their mettle, instead of giving up so easily, and running for protective cover.

They should recall the old adage: It is only when the going gets tough that the tough get going!

( blfeedback@thehindu.co.in)

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