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Economists pitch for second round of stimulus worth 2% of GDP

Economists suggested the stimulus to be 2% of the GDP and should be shared between central and state governments so that the burden is evenly distributed between them and benefits are also shared in the same proportion

Nirbhay Kumar | August 29, 2020 | Updated 19:56 IST
Economists pitch for second round of stimulus worth 2% of GDP
PM Narendra Modi had announced a stimulus package worth Rs 21 lakh crore or 10% of India's GDP in May this year

Key Highlights:

  • Top economists pitch for another round of fiscal stimulus worth 2% of GDP to put the economy on growth path and protect jobs.
  • Additional borrowing to fund stimulus and front-loading of expenditure in infrastructure, especially small-ticket projects involving local companies, among key suggestions.
  • The Centre had announced stimulus package worth Rs 21 lakh crore or 10% of India's GDP in May but most experts contested the size of the stimulus and pegged it at less than 2% of the GDP.
  • The government has indicated that it will wait for the pandemic to subside before offering further financial support to trade and industry.

Another round of fiscal stimulus worth at least 2% of gross domestic product (GDP) is needed to put economy on growth path and protect jobs, top economists have said. They have suggested additional borrowing to fund the stimulus and front-loading of expenditure in infrastructure, especially small-ticket projects involving local companies, that employ local people to support their income.

Pronab Sen, country director of the International Growth Centre and former chief statistician, called for continuation of direct transfer of food and cash for some more time to help the vulnerable section of the society.

Even as the government has indicated that it will wait for the pandemic to subside before offering further financial support, Sen said that the deadly virus is going to be around for some time and a vaccine is still not in sight while economic imperatives are getting more and more pressing.

He said that delay in stimulus may delay economic recovery and more firms would go bankrupt.

"This is the time it (stimulus) should be done. But at the moment the government is silent. The industry is absolutely correct in demanding a fiscal stimulus now when they are ready to start production," the former chief statistician said.

He stressed that all relatively small projects, rural roads, housing (urban and rural), micro and mini irrigation works, drinking water pipeline projects etc should be taken up using local firms.

DK Srivastava, EY India Chief Policy Advisor and also a Member of the Advisory Council to the 15th Finance Commission, endorsed another tranche of fiscal stimulus but said that its timing should be decided in line with the introduction and implementation of COVID-19 vaccine.

"The moment the vaccine starts getting circulated, economic activities will open up fully and that should be the time we should stimulate the demand. Right now, any stimulus will have fractional impact and may lead to firming up of inflation," said the noted economist.

He suggested the stimulus to be 2% of the GDP and should be shared between central and state governments so that the burden is evenly distributed between them and benefits are also shared in the same proportion.

"Most of it should come from fiscal side because it was the fiscal stimulus which was relatively weaker part of the stimulus (announced in May following the gradual lifting of lockdown). The monetary stimulus was strong but most of it was ineffective because of transmission issues and also because of the fact that fragmented lockdowns continued," Srivastava said.

The experts recommend high government spending rather than facilitating bank loans.

"There is enough credit availability but no takers for lack of demand. The government should give up its conservative fiscal stance, as most responsible governments - both among the rich and poor countries - have done after the pandemic," said R Nagaraj, eminent economist and professor at Indira Gandhi Institute of Development Research (IGIDR).

The government had announced a stimulus package, termed as Atma Nirbhar Bharat package, in May this year to combat economic recession triggered by the coronavirus pandemic. While it claimed the stimulus package was worth Rs 21 lakh crore or 10% of India's GDP, most experts contested the size of the stimulus and pegged it at less than 2% of the GDP.

"I would say the government should provide another round of fiscal stimulus of minimum 2% of GDP at this stage," said HDFC Bank chief economist Abheek Barua.

He, however, noted that the government may not come up with any significant stimulus until there are signs of infections going down and economy on a clear path of recovery.

"Given the rise in public debt even in absence of a stimulus, I don't think they are in the position to offer a big stimulus," noted Barua.

While some of the high frequency data such as Purchasing Managers Index (PMI), monthly vehicle sales and GST collection data have signalled improvement compared to sharp fall in the months of April and May, the economy is unlikely to reach pre-COVID level any time soon. Most economists expect the GDP data to show sharp contraction during the first quarter of FY21.

Also Read: Enough legislative backing for GST compensation borrowing program: Centre

Also Read: States to bear interest costs if they borrow more than shortfall GST implementation

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