Nirmala Sitharamans 5-part package could be a 1991 redux

Analysts and economists criticising the Indian Finance Minister′s stimulus-cum-reforms package are missing the woods for the trees. As increased liquidity improves the velocity of money, the economic growth engine could well start purring once again.

The Indian stock markets have crashed about 5 per cent over two days following the announcement of a $290-billion stimulus-cum-reforms package by Finance Minister Nirmala Sitharaman. The reason A series of reports by global and Indian research agencies that claim the package is really worth only a fraction of the headline figure as it depends more on providing liquidity than direct giveaways. The package, the reports add, will not fuel any immediate demand creation and, therefore, will not lift the Indian economy out of the Covid-induced trough it finds itself in.

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All these reports seem to be missing the woods for the trees. As the late Chinese leader Deng Xiaoping famously said: “It doesn't matter whether a cat is black or white, as long as it catches mice.” The same logic applies here. Economists and politicians are arguing that providing liquidity support - a loan in layman's terms - is very different from giving money and tax breaks to individuals and companies. The latter, they argue, will lead to consumption, ie, increased demand, and therefore, provide a fillip to the economy.

This line of thinking misses the point that money - either as a giveaway or as a loan - will fuel economic activity. The nature and source of the funds don't matter. What matters is that small and marginal farmers, street vendors, MNREGS beneficiaries, tribal people and micro, small and medium enterprises (MSMEs) have all been allocated billions of dollars, which they will spend. This will inject cash into the system and let the velocity of money create a multiplier just as a classical stimulus would.

This cash flowing through the economy, changing hands multiple times, will create incremental value at each stage of exchange, generate additional purchasing power and kick start the economy with a slight lag of, maybe, a couple of quarters.

Then, the wide-ranging and deep reforms announced by the Finance Minister can completely change the trajectory of the Indian economy over the next three to four years and set the stage for rapid economic growth over the next decade and more. History may well judge Sitharaman's five-part package as a 1991 redux.