The Hindu Business Line : Stimulus package a drop in the ocean

New Delhi, Jan. 4 The Friday Stimulus from the central bank and the Union Government, designed to pep up the spirit and revive activity amid the concerns over anaemic growth prospects for the global economy, coupled with the December 7, 2008 package of the UPA Government are but a drop in the ocean of a trillion-dollar Indian economy.

Predictably, the manufacturer-exporters have been mortified, terming these props as too little and too late to help them tide over the titanic challenge of shrinking contracts for business in a generalised recessionary global economy.

As the architect and spokesman of both the stimulus packages, the Planning Commission Deputy Chairman, Mr Montek Singh Ahluwalia, knows what he was telling when he conceded that “the crisis was thrust upon us not because of internal developments but due to truly exceptional circumstances in the global economy and the crisis is also not going to end in the current year.”

With the UPA Government nearing its terms in a couple of months, there won’t be any further relief measures to any special lobbyist groups among industrial segments, even as the authorities are quite confident that the targeted measures for infrastructure, automobiles, non-banking finance companies, small and micro enterprises, besides specific fiscal reliefs to industry and exports, would help expand bank credit flows to productive and the real sectors of the economy from their relatively reticent and low levels.

Growth tab

As it is, hard numbers after September 2008 do not inspire any hope that the stimulus measures would in any way help impart and ensure growth momentum. The GDP growth moderated from 7.9 per cent year-on-year (y/y) in the June quarter to 7.6 per cent in the September quarter with the economy likely to decelerate more sharply in the second half of the current fiscal.

Industrial production contracted 0.4 per cent y/y in October, after rising 5.5 per cent in the previous month, while exports have nosedived by 15 per cent in October and another 10 per cent in November, 2008. The rupee ended 2008 at around 48.50 a dollar, close to being 20 per cent weaker than the start of the year.

In the first half of the current fiscal, the growth for agriculture, industry and services were estimated at 2.9 per cent, 6.5 per cent and 9.8 per cent, which are lower than the previous year’s first half in each segment. As such, the prospects of ending the fiscal with even 7 per cent GDP growth are none too promising, given the slide in industrial production and exports, both of which bear substantial implication for employment and retrenchment in the face of a dip in domestic and overseas demand.

If the stimulus is meant to crack open the credit sluice of the banking system to goad consumption and by which expansion of activity in the real sector, the banking system is, however, risk-averse to play ball, thereby ending up as spoil-sport to the stimulus party of the Government.

It is small wonder that even as an outgoing government, its Plan panel is finalising Plan and non-Plan expenditure that would be needed in the next fiscal year, and here it has included proposals for recapitalisation of the public sector banks, estimated to be of the order of Rs 20,000 crore over the next two years.

This has been necessitated to ensure higher credit growth needed to sustain the economic momentum for the next fiscal even as 2009-10 might turn out to be worse than this fiscal so that the banking system would not suffer from capital adequacy constraints.

Over-cautious

So the authorities this time round are over-cautious that the stimulus package, contingent upon higher flows of credit to productive segments of the economy, does not falter for want of fuel in the form of continued financing to the banking system.

But how far a cautious banking industry can proceed ahead, particularly when an outgoing government presses it to act, when it is to act with tact, is open to question. In all, would “a substantial counter-cyclical stimulus”, as the second package is so declared, in the form of lower interest rates and enhanced public spending to counterbalance a collapse in private demand, be able to deliver results is itself a stimulating question, policy analysts wonder.

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