Stim­u­lus Not a Panacea

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

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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.

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