Stimulus Not a Panacea

Only stable policies and tax rates can bring back the economy's mojo

Only stable policies and tax rates can bring back the economy’s mojo

The government is worried about the economy. In the past week, different ministries have seen a flurry of meetings to brainstorm how they can add some zip to the economy. Meanwhile, the Prime Minister’s Economic Advisory Council, which had not been constituted after the NDA government came to power, has been revived with Bibek Debroy heading it. The Chief Economic Advisor to the finance ministry, Arvind Subramanian, has been given a one-year extension. It was richly deserved because he had been flagging the slowing economy for quite some time, something the government probably did not pay much heed to.

The fact that the economy is in a bad shape is now apparent to everyone who is not wearing blinkers. Growth has fallen for six successive quarters. The first quarter GDP growth was 5.7 per cent, which is a three-year low. And if the GDP was being calculated the way it was before the methodology was revised in 2015, it would have looked even worse. Meanwhile, the current account deficit has started widening. And job creation has been tardy, to say the least, with some economists worrying that job losses because of demonetisation, automation and a host of other reasons are higher than the number of jobs being created.

A number of economists have prescribed a spending spree by the government as a Keynesian stimulus to the economy. Some of them have suggested that even the fiscal deficit target could be relaxed for the stimulus package. In the past, stimulus packages have given mixed results. Many times, they have given a short-term boost to the economy, while creating a big fiscal deficit and worse problems in the medium to long term. However, when private investment is flagging, private consumption is low and exports are refusing to pick up, a stimulus does seem like the right prescription.

But the stimulus alone will not solve all the problems. One of the points made by all economists is that private investment is at an alltime low. No one is rushing to set up new factories. If anything, assets are changing hands, but few greenfield projects are being initiated.

One reason for that is overcapacity. It is estimated that in many sectors, capacity utilisation has not gone beyond 70 per cent. It is easy to blame low private consumption but there is an alternative theory doing the rounds — that private consumption is actually going to imported goods, which are often cheaper than those manufactured in the country.

But beyond that, the bigger problem, say industrialists in a number of sectors, is the worry about inconsistency in policy making. Even companies that have enough cash reserves are chary of investing unless they see some sort of consistency in policy making.

In the past couple of years, tax rates have changed and changed again. Tax laws have changed. Even policies have changed. The policy of bringing more drugs under price control, or trying to get electric vehicles to substitute the current generation of petrol and diesel engine vehicles and even locomotives, are pointed out as examples of why companies in these sectors are worried about investing. A number of industrialists say they are afraid of starting projects simply because they do not know what the thinking of the government will be. Long gestation projects need stable policies. And while it is fashionable to say that consistency is the virtue of fools, when it comes to government policies, it might actually be the reverse. ~

A number of industrialists are afraid of starting projects as they do not know what the government thinking will be.