It is welcome that finance minister Nirmala Sitharaman expressed the willingness, while talking to this newspaper and others, to keep open the possibility of further fiscal action. Professional forecasters project FY21growth rates that scatter below zero. The finance minister justified the fiscal stimulus of a mere 1% or so of GDP as learning from the UPA stimulus of 2008-13. The trouble with the UPA stimulus was not its size but the government’s failure to exit the stimulus when it should have. Sustained high fiscal deficits resulted in high inflation and a widening current account deficit. It did not help that policymaking was paralysed in the wake of corruption scandals over early 2011 to the second quarter of 2013-14. Since there is no reason for the present government to either worry about coalition compulsions or policy paralysis, the situation is not analogous.
The size of the fiscal stimulus today would be positively correlated with the rate of economic growth achieved. A low increase in the fiscal deficit would result in a mild rise in the debt-to-GDP ratio but also to a tepid rise in economic momentum. A large fiscal deficit increase now, in contrast, would result in a larger, immediate rise in debt/GDP but also yield a faster rate of economic growth. The latter combination would lead, over the next few years, to a lower debt/GDP number, as compared to short-term fiscal restraint resulting in growth struggling to outpace the rate of interest. Indians at large, apart from professional observers of macroeconomic health, including rating agencies, would prefer a trajectory that leads to greater momentum in the short term, resulting in a declining debt/GDP ratio in the medium term. Economic prudence lies in a larger stimulus, rather than a smaller one. The government has adopted various reform measures, ranging from cuts in the corporate tax rate to deregulation of agriculture and mining. For these to generate the desired-for supply response, demand has to go up. Industry sits on unutilised capacity. A boost in demand can produce immediate, tangible results. Do deliver it.