The Hindu Business Line : Key to revival

An air of unreality pervades the government’s attempts to grapple with the economy’s inexorable slide. The Finance Ministry urges, in its mid-year review, patience while the slew of fiscal and monetary measures take effect. But do not be surprised if the excise duty cuts and some competitive marketing translate into a spurt in demand for consumer durables next month. Whether that spurt is maintained will depend not so much on that time lag as on the government’s contra-cyclical spending programme that actually translates investment into additional employment and disposable incomes. Given the current dismal record of Plan project implementation, surely some initiative to reverse that sorry performance is in order?

With Parliament now prorogued, key legislation that would have aided industrial investment and expansion, such as the mining policy and amendments to the Land Acquisition Act, will have to wait till after the next government assumes power. All that the Government is left with in its armoury are short-term monetary and fiscal tactics, the impact of which may not turn out to be all that beneficial if the third quarter drags industrial growth further into the red. Consider the second stimulus package reportedly under consideration. Apart from the Reserve Bank of India, which will try and reduce the cost of credit, the policymakers do not seem to be talking in one language. For instance, there is mention of import duty cuts in essential goods to bring prices down and boost demand. How would domestic producers of like products view such cuts, especially when their own inventories are piling up? Some ministries may desire protection and textile exporters may seek incentives, so as to save employment; but will that help exports at a time when world markets are in free fall? How can the policymaker ensure easy credit when banks would rather invest in government securities? The problem is not the time that monetary or fiscal measures take to effect change but the absence of the context which gives those policies room to work in. So long as the sentiment for investment stays bleak, the revival of consumer spending will remain temporary, and the ability of policy to reduce prices, limited. Right now the sentiment is indeed bleak.

The second stimulus package should not stop with short-term sector-specific boosters and extra doses of the first package. The key for a revival does not lie in the levels of liquidity or the amounts the Government allocates for Plan projects but in their ability to create new opportunities. A verdict of public money well spent would spark the impulse in banks to lend and for private investments to create fresh capacities.

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