More can be done: For GoI’s economic package to make a difference, demand needs a fiscal stimulus

Clipped from: https://timesofindia.indiatimes.com/blogs/toi-editorials/just-not-enough-gois-economic-package-wont-make-a-real-difference-india-needs-a-fiscal-stimulus/TOI Edit

Times of India’s Edit Page team comprises senior journalists with wide-ranging interests who debate and opine on the news and issues of the day.

The second wave of Covid-19 abruptly cut short a nascent economic recovery and introduced uncertainty. In this backdrop, GoI has been urged by many, including RBI’s monetary policy committee, to extend fiscal support. FM Sitharaman yesterday announced a Rs 6.28 lakh crore package of measures. Unfortunately, it’s underwhelming. A large part of it is a set of reforms measures spread out over five years. Some of it are procedural changes in existing schemes and measures that had been announced earlier. The core of the package is premised on banks willing to step up lending with government-backed guarantees. When seen in its entirety, this package will not be enough to offset the uncertainty and boost flagging consumption.

GoI’s policy approach since last year has been to let the banks do the heavy lifting. In line with this approach, Rs 2.67 lakh crore of new package is built around the hope that banks will lend to Covid-affected businesses and others when backed by guarantees. The guarantee aims to lower the lending risks of banks. This approach has so far not yielded satisfactory results. Bank credit over the last year has grown just 5.7% and lags the 9.7% growth in deposits. This was the case even before the second wave hit us. Banks are simply not deploying enough of the money coming their way. An environment of risk aversion has neutralised the efficacy of monetary measures.

This leaves GoI as the one controlling the economic levers that can make a difference. Urban poor need urgent fiscal support through cash transfers. GoI has a pipeline of infrastructure projects. Executing them with fiscal support will provide the stimulus in the form of a surge in spending. This is the only way to create a virtuous cycle as contracts to private firms will have a positive impact on jobs and aggregate demand. A delay will create permanent damage as some firms may never recover from two shocks in 15 months. Vaccination and speed are essential for recovery. Offering free visas to foreign tourists as the FM did yesterday can work only when there’s normalcy.

This piece appeared as an editorial opinion in the print edition of The Times of India.

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