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Given the formidable constraints being faced by the government in providing a hefty fiscal stimulus, there is clearly a need to examine and go for unconventional measures to boost the sagging demand in the economy, says S. D. NAIK.

Owing to the slowdown in software exports, forex reserves have been declining at a fast pace.

The stimulus package unveiled by the Government on December 7 is too small to make much of a difference to the sagging confidence of the Indian industry that is witnessing significant job losses following a slowdown in exports and GDP growth.

The package has been cobbled together by proposing an additional Plan expenditure of Rs 20,000 crore, across-the-board reduction of excise duty by 4 per cent, Rs 350 crore additional funds for export incentives, an additional Rs 1,400 crore for Textile Upgradation Fund (TUF), and so on.

The total cost of the package is Rs 30,700 crore, including the tax revenues foregone. It amounts to a mere four per cent of the total expenditure already proposed in the budget and works out to just 0.6 per cent of GDP.

The fiscal package is certainly not adequate to offset the huge drop in the proposed capital expenditure by the corporate sector in recent months after the global financial crisis. According to reliable reports, projects worth Rs 85,448 crore (about $17.5 billion) were shelved over the six months ending September 2008, and more could be shelved in the coming months.

However, the unfortunate part is that the country’s fiscal situation is already in a pretty bad shape today with hardly any headroom for a big-bang approach to government expenditure on the lines of what China is planning with a stimulus package of $586 billion.

This is because no effort was made to rein in unproductive subsidies on petroleum products, food and fertilisers or other unproductive expenditure over the last four years when the economy was booming and there was a surge in tax and non-tax revenues of the government.

Moreover, this October, the government had to come up with a huge supplementary budget authorising the government to spend an additional Rs 2,37,286 crore equalling about 4.5 per cent of GDP. Of this, the net cash outgo was estimated at Rs 1,05,613 crore and the remaining Rs 1,31,672 crore to be met by additional receipts/recoveries or savings of ministries and departments.

Most of the additional expenditure proposed again was towards meeting the revenue expenditure and not capital expenditure. More specifically, it was to accommodate the payments towards the huge farm loan waiver scheme, salary hikes to Central Government employees under the Sixth Pay Commission award, and oil and fertiliser bonds.

Consequently, the Centre’s fiscal deficit (including some of the off-budget expenditures) is projected at 7.5 per cent of GDP during 2008-09, three times the level of 2.5 per cent in 2007-08. Even with the miniscule stimulus package now announced, the fiscal deficit of the centre is likely to exceed 8 per cent of GDP.

At a time when the Indian economy is being confronted with the economic slowdown and the consequent job losses and demand recession, it is facing the new problem of dealing with the enormous socio-economic cost of Mumbai terror attacks.

Initial estimates of business lost in Mumbai during the first three days of the November 26 attack is placed at Rs 50,000 crore plus foreign exchange hit of $20 billion.

These include the opportunity loss to crucial institutions such as stock exchanges. The long-term losses for the country as a whole are expected to be much more in terms of slowdown in tourism earnings and more job losses in the services sector.

To add to the problems of the government, a balance of payments crisis is also looming large, with a slowdown in exports, a decline in invisibles receipts and other inflows. Earlier, the foreign exchange earnings flowing in from the booming software exports, foreign institutional investments in the stock market and remittances from abroad were used to help finance the trade deficit. Today, that cushion has been slipping. The country’s forex reserves have also been declining at a fast pace.

Moreover, the expenditure on countering the growing threat of terrorism may escalate significantly, as there is an urgent need to reform the police force, provide it with better equipment and training.

Also, there is a need to strengthen intelligence agencies, raise more contingents of commandos, improve sea patrolling and guard the skies. There can be no more dithering in these areas since the country is already being viewed by many as a soft state.

Given the formidable constraints being faced by the government in providing a hefty fiscal stimulus, there is clearly a need to examine and go for some unconventional measures to boost the sagging demand in the economy. Economists and experts have already suggested some such measures.

The government could consider constituting a special fund with the participation from LIC, UTI and other institutions, backed by the Reserve Bank of India, with allocation of $10-20 billion from its foreign exchange reserves. Such a fund could be used to increase infrastructure spending and shore up the stock market to restore investor confidence and stabilise the depreciating rupee.

The battering of even some of the blue-chip stocks could eventually hurt the entire financial system. Restoring investor confidence is of prime importance at this juncture since many companies have put on hold their new and rights issues, thus adding to the liquidity crunch being faced by the corporate sector.

Another suggestion is to induce some of the better functioning public sector units, particularly those engaged in infrastructure, such as power, transport, construction, communication etc. to expand and speed up their investment programmes. Incidentally, many of these PSUs have substantial reserves which could be utilised to shore up demand and investor confidence.

In a situation of ongoing economic slowdown and growing job losses, protecting the poor assumes great importance. Some of the measures to minimise the hardships of the poor and vulnerable and, at the same time, to shore up the sagging overall demand in the economy could include:

A significant step up in disbursal of bank credit to small and tiny enterprises; most of these are starved of institutional finance;

Expanding the scope of National Rural Employment Guarantee Act (NREGA),

and increasing the daily wage under the scheme to Rs 100 per day;

Providing a new deal to micro-finance movement by expanding its scope and coverage;

Providing a big boost to low-cost housing.

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