Fiscal Stimulus: What For, How, How Much And For How Long?

A very detailed article in ‘Economic Times’ on the various Japanese-assisted infrastructure schemes. It is welcome, in more ways than one.

Once again, the same old hackneyed arguments about whether India needs bullet trains had cropped up. There is a deliberate conflation of arguments that the money could be used elsewhere. That is patently false and a lie. That money – on very concessional terms – is available from Japan only for this project. I had blogged on some of these patently misleading and mischievous arguments in December 2015. There are likely strong and sizeable multiplier effects. I am glad Ajit Ranade agrees with me. He makes the right arguments on India’s space missions and on India’s public transportation projects.

A friend shared this piece by Gordon Chang on how India and Japan are encircling China.

A Deloitte report that paints India in brighter light than China is briefly reported here in Bloomberg.

If the previous link set you up for listening to or reading only ‘Feel Good’ stuff on India, this could make you ecstatic. It is a speech by Nilesh Shah of Kotak Mutual Fund.

Merryn Somerset Webb, ‘Editor in Chief’ of Moneyweek provides a stiff competition to Nilesh Shah, in print. I hope it is not behind a paywall.

Swaminathan Anklesaria Aiyar relishes the prospect of promoters leaving and workers staying as bankruptcies become de rigueur in India. Debashis Basu has a more detailed article on how the bankruptcy resolution of Synergies-Dooray was handled. It is more lucid than some of the other press articles on the ‘sham’ resolution. I had covered this case in my blog post here.

If the sceptic in you rears its head, then here are the links for you on the failure of National Skill Development Mission to hit its targets. One is based on a research report by Indiaspend.org (which, in turn, is based on the Sharada Prasad Committee report, I think) and the other is a news-story. The first link is more about Skill Development franchisees that failed to deliver in terms of placement. Both appeared in ‘Business Standard’:

We should probably look for the Sharada Prasad Committee report and read it ourselves since newspapers can choose to highlight some aspects and not others, etc. The report was submitted in December 2016 and made public in April 2017.

Business Standard reports on a research report by the State Bank of India research team. It calls for a boost to public spending, disregarding the potential concerns that credit rating agencies would express on fiscal slippage.

Ajit Ranade writes a brief and clear article calling for fiscal boost to the economy. Spells out three areas where they can go – affordable housing, pensions and labour costs to be borne by government to boost hiring and enhanced support for manufacturing and export service support schemes. I am not sure of the third. I am fully behind the second and on the first, I am neutral. Enough policy boost has been given for the first.

If I were recommending, I would boost public sector banks’ capitals in return for some stringent accountability and wholesale changes to their governance and accountability.

India missed the boat on fiscal boost to economic growth in 2014-15 when the new government, thoughtlessly, engaged in pro-cyclical fiscal consolidation to the extent of 1.1 per cent to 1.8 per cent of GDP in 2014-15 by inheriting implausible assumptions and accepting expenditure postponement of the outgoing government. The target of 4.1 per cent for fiscal deficit/GDP ratio in 2014-15 was an impossible one. The previous achievement of 4.5 per cent in 2013-14 was not a real achievement. UPA II’s economic misdeeds of omission and commisison would take years to show through.

Given all that, the government should have come out with a White Paper on the economc situation and proceeded to tighten fiscal policy more gradually. It should have used the oil price crash windfall to reform banks, recapitalise and clean up balance sheets and get private sector credit growth going. Instead, it was used to achive fiscal deficit targets in the hope that a credit rating upgrade would be coming. It has not. India missed an opportunity to provide the needed boost to growth when private sector balance sheets were (and are still) being mended.

On 8th September 2015, I was one of the few people invited for a conversation with the Prime Minister at 7, Race Course Road. I had said that a specific 0.5 per cent fiscal stimulus earmarked for banking recapitalisation would be desirable, at that stage. Evidently, it was not heeded.

I am not viscerally or intellectually opposed to a fiscal stimulus now. But, I am guarded. I can react better when I see the details. That would make all the difference between another wasted effort with negative consequences and a smart growth multiplier. I am concerned that one could commit the mistake of thinking that two wrongs make a right.

I am also concerned that the calls for fiscal stimulus do not take into account the fiscal stimulus already in motion. The State governments have managed to spend even more than their much improved revenues under the generous Fourteenth Finance Commission. They have, as usual, promised fiscal prudence from 2017-18 onwards. But, fiscal years 2015-16 and 2016-17 have seen slippages. No major asset creation has happened.

In 2016-17, State governments spent less than budgeted by about 7 per cent as per Credit Suisse estimates. Capital expenditure is a small portion of the overall expenditure and there too, they spent less than budgeted. But, note that it does not mean that their deficits would be lower. They spent less than what they budgeted. We have to wait for deficit numbers to see if there was any meaningful reduction in overall State fiscal deficits in 2016-17 compared to 2015-16 or a further slippage.

Farm loan waivers announced by eight States would amount to 1.3 per cent of GDP spread over 2-4 years, as per Neelkanth Mishra of Credit Suisse. That too is a fiscal stimulus. But, he noted,

This is what happened from 2009 onwards. When loans are waived and even prudent borrowers take the wrong hints, loan growth actually takes a hit. It is not good for borrowers and lenders. So, it is bad fiscal stimulus and unsound economic policy. But, the train has left the station.

That is why when one comes down on the side of fiscal stimulus, the questions of what for, how, how much and for how long and economic quid pro quo (accountability, outcomes and productivity, to name just three) matter.

Then, there is the Seventh Pay Commission recommendations that are not yet fully implemented by the Centre and then States would follow suit. So, I am not sure if the calls for fiscal stimulus (SBI, Ajit Ranade) take into account these expenditure already in motion.

One of the most useful set of policy recommendations with as much specifics as is possible in a newspaper column is to be found in this article by Shankkar Aiyar, published on 10th September 2017. This is not high altitude platonic stuff but specific action areas are pinpointed.

Sometimes, the more effective stimulus is a leadership that understands, accepts and acknowledges the problems and is focused on resolving them. The problem may not be money but all the uncertainty that followed uncoordinated and thoughtless sequencing of policy actions and reforms with no heed for the short and medium term side effects. Listening to the so-called intellectuals who are willing to speak truth to the power, at least once in a while, will do more good than harm. Throwing money at problems may not solve and may, on occasions, worsen the situation.

Think of UPA I and II. They were not afraid to throw money at the problems. What did they leave behind for India? A big mess. What were they missing? Credible, sincere, competent and focused leadership.

[Postscript: Those who clamour for fiscal and monetary stimulus and yet claim that the economy is in fine fettle must stop and accept that they cannot have it all]

This article was first published on The Gold Standard and has been republished here with permission.

Also read: No avoiding fiscal stimulus: not just investment, consumer psychology has also been hit