Fumbling Indian economy needs a stimulus package. Can the Modi govt afford one?

After three years of being in power, the Narendra Modi government seem to be coming to terms with the fact that there is not much to be proud of in its tenure so far. 

Worried about the next Lok Sabha elections, Modi's top Cabinet colleagues – Finance Minister Arun Jaitley, Commerce and Industry Minister Suresh Prabhu and Railways Minister Piyush Goyel – met government officials to chalk out a plan to push GDP growth and generate jobs. 

“We have taken note of all the economic indicators that are available. This has been a pro-active government on the reforms agenda. Over the last two days, I have had a series of discussions with ministerial colleagues and various secretaries,” Jaitley was quoted saying by a news agency. 

But, is it possible to change course after the economic setbacks of the last two years of the government? 

In the words of Greek Playright, Sophocles: “All men make mistakes, but a good man yields when he knows his course is wrong, and repairs the evil. The only crime is pride.” 

PM Modi launched 'Make in India' in a world that was getting averse to the idea of globalisation; a well intended 'Skill India Mission' was launched that trained 18.03 lakh persons under PMKVY (Pradhan Mantri Kaushal Vikas Yojna) in 2015-16, out of which only 12.4% persons were placed. 

And top it all, demonetisation was announced without consulting any reputed economist and that resulted in the death of the informal economy which employed 90% of the 47 crore workforce of the country. 

Whatever was left in the economy is getting destroyed due to the hasty implementation of the Goods and Services Tax (GST). By now it should be clear that GST has become a source of harassment for small traders due to its complexity and poor infrastructure.

Need for stimulus

At times like these, the best way to boost the economy is to provide a stimulus package in the form of relaxed taxes and more credit to the industry. But before any stimulus is announced, the government needs to look at the nature of the economic slowdown in the country. 

The current problem is largely of the government's own making. As mentioned above, it first took a disastrous step of demonetising 86% of the currency in circulation, leading to a severe cash crunch. 

Then, the government implemented the GST without proper planning. As a result, numerous small and medium enterprises are cash-strapped. 

The Index of Industrial Production rose by a mere 1.2% in July 2017, compared with 4.5% in July 2016. The cumulative growth rate of factory output was just 1.7% (April-July). 

Therefore, the government will have to use its stimulus in a way that it addresses the problem of working capital in the economy. 

There is also distress in the farm economy. 

Farm prices have been depressed over the past many months, leading to a lack of capital to be invested for the next crop season. A large part of the stimulus, if at all there is one, should got to the agriculture sector. 

What a package would mean

Any stimulus requires deviation from the fiscal consolidation path. In the budget for 2017-18, Jaitley set a fiscal deficit target at 3.2% of the gross domestic produce, and aimed at a 3% deficit for the next financial year. If the government intends to spend more it will have to borrow more, which will lead to a higher fiscal deficit in the next budget. 

In 2008, when the United Progressive Alliance (UPA) government announced a stimulus package for the industry, the Indian banking sector was in a robust position. But in 2017, there are non-performing assets of more than Rs 8 lakh crore in the banking system. 

Any attempt to boost credit for industry requires banks to be in a healthy shape. Increased credit outflow will first require the banks to be recapitalised for the already skewed capital-adequacy ratio. 

Whether the government has that kind of resources at its disposal, however, is the big question. 

Edited by Joyjeet Das