Stimulus 3.0 should zone in on direct income support and infrastructure spend

In order to ensure that bounce in market demand does not peter out soon, despite rising sales, the government's introduction of Stimulus 3.0 is loaded with sound economic rationale and should go a long way in sustaining consumption, demand and growth.

Reserve Bank of India Governor Shaktikanta Das has said India is on the cusp of a full-blown economic recovery. The bounce in consumption in many sectors, ranging from consumer durables to automobiles to steel, among many others, does seem to bear out his prognosis.

Read more:

Sitharaman opens up all sectors to pvt sector, addresses bankruptcy laws; healthcare and online education

Sitharaman presents clean, green, realistic Budget

Sitharaman wields the tax axe

Sitharaman walks the talk for foreign investors

India's space odyssey gets a turbo boost

Many economists are, however, wary that this bump in consumption is the result of a combination of factors, namely, a flattening of the Covid curve, pent-up demand and festival spending. It could peter out once this demand is satiated in a couple of months or if there is a second wave of Covid cases or a combination of these two. The RBI's Consumer Confidence Survey for September showed the Current Situation Index (CSI) at its third successive all-time low - at 49.9 - as the respondents perceived further worsening in general economic situation and employment scenario during the last one year. “Households were, however, more confident for the year ahead: the future expectations index (at 115.9) improved for the second successive survey round... Consumers expect improvements in general economic situation, employment conditions and income scenario during the coming year; discretionary spending, however, is expected to remain low in the near future,” the survey findings said. Then, the Business Confidence Index brought out by the National Centre for Applied Economic Research (NCAER), which tracks business sentiment across sectors, was at 46.4 in the first quarter of 2020-21, a drop of 40.1 per cent from its level of 77.4 in the previous quarter.

Time for a Stimulus 3.0

Therefore, it is evident that the Covid-19 pandemic has shocked both the demand and supply sides of the Indian economy. To sustain the current, possibly temporary, upturn in demand, economists are saying the government has to come out with a third stimulus package.

More to read:

Reforms to uncork 'Make in India' defence contracts worth billions

RBI chief is optimistic about India's economic recovery

India preps for the world's biggest privatisation exercise

The credit culture is changing in India

Primary listings abroad could help Indian start-ups get better valuations

That's because Stimulus 1.0 has run its course and the second tranche, in the form of salary advances, LTC encashment and bonuses, was clearly inadequate for an economy of India's size.

The questions are: How big should it be In what form should it be given And how much can the government afford

Panagariya for $60-90 billion fiscal stimulus

According to an article in The Economic Times by former NITI Aayog Vice Chairman Arvind Panagariya says the current account surplus of 3.9 per cent of GDP in the April-June quarter indicates the extent to which total domestic expenditure - comprising consumption, investment and government spending - falls short of domestic supply. former NITI Aayog Vice Chairman Arvind Panagariya says the current account surplus of 3.9 per cent of GDP in the April-June quarter indicates the extent to which total domestic expenditure - comprising consumption, investment and government spending - falls short of domestic supply.

If there is no further stimulus package, experts think, India will end the year with a 1 per cent current account surplus. To maintain a sufficiently high investment rate, a country at India's stage of development should run a current account deficit of 1-2 per cent. A back of the envelope calculation, thus, suggests the expected stimulus package should add up to 2-3 per cent of GDP, he says in the article. This will entail expenditure of $60-90 billion.

Others suggest a more conservative estimate for the stimulus. They point out that so far, India has provided a fiscal stimulus equivalent to 1.2 per cent of GDP. The average stimulus provided by similarly placed BAA rated peers is 2.5 per cent. Thus, they argue, India has sufficient room to double the fiscal stimulus. This will call for the government to spend an additional $35-40 billion.

Vigorously supporting a stimulus

Fiscal hawks, however, vehemently oppose this prescription. They point to a CARE Ratings study that suggests India's fiscal deficit this year will rise to 9.2 per cent this year against the Budget estimate of 3.5 per cent. Such a high deficit, they argue, will add to public debt, lead to runaway inflation and could lead to global ratings agencies such as S&P's, Moody's and Fitch downgrading India to junk bond status.

Still more to read:

Modi certifies that the farmer is India's economic super-hero

Indian MSMEs in the age of AI

Indian start-ups go from strength to strength

Factory output at a new high as India fights back

Goyal's train of thought addresses cut in rail freight costs, improving passenger experience

But proponents of growth vigorously support another round of fiscal stimulus. Without such pump priming, the economy will take much longer to get back on a growth trajectory of 8 per cent of higher. This would result in lost opportunities worth hundreds of billions of dollars, which an economy at India's stage of development cannot afford, they point out.

Priority is to counter deficits

Despite the recent pick-up in growth, the economy is in deep contraction. From Moody's to IMF and World Bank to RBI and S&P's, has projected a contraction of 11.5 per cent to 9 per cent for the Indian economy in 2020-21.

The priority should be to counter this, not worry about deficits and inflation, at this point in time. In any case, India's debt-to-GDP ratio, which is likely to fall to 90 per cent in the current year from 72.2 per cent in 2019-20, is still in a much better shape than many higher rated and richer countries.

In any case, they point out, the best way to bring down the debt-to-GDP ratio is to increase GDP, which forms the denominator for this ratio.

Direct income support and infrastructure spending

IGB spoke to two leading economists who said the best way to administer the stimulus would be to provide direct income support to people below a threshold income level. But it will be devilishly difficult to administer such as scheme as identifying intended beneficiaries will be a mammoth task and lend itself to leakages and pilferage.

Instead, it may be a good idea to provide direct income support, a la the scheme for farmers, to those below the poverty line, extend the free food scheme for six more months and invest heavily in infrastructure and housing.

Since poor people have a higher propensity to consume, this will lead to immediate demand creation at the bottom of the pyramid, which, in turn, will percolate up the economic ladder.