The Political Economy Of Stimulus: Which Side Are You On?
Siddik Rabiyath
A few months back the Union Finance Minister Nirmala Sitharaman presented her maiden budget and most of the media praised that it was quite a promising budget. Needless to say, the dissent on the budget was so bleak and unheard in the five trillion brouhahas. The target of the claim is hardly five years with their projected growth rate of 7-8 percent. A few weeks later the growth projection and performance has plummeted to one of the lowest in the growth past of the 21st century India. Many sectors including the much-discussed slowdown of the automobile sector marked a decline in their production and sale. As usual most of the media projected it as an issue of the automobile industry but what we understand is much graver concern than a one sector slowdown as per the government data source. To tackle the issue, the government had declared stimulus packages and again the same has hailed as something unprecedented. This sort of mediocrity – hailing and sailing with the government makes no constructive sense if the economy faces a severe backlash in terms of production, consumption, and distribution. It is important to note that what kind of measures the government had initiated to put the train back on rails only makes sense if and only if the policy may strengthen us to survive the downturn.
Stimulus Package
If we understand the vocabulary of the market, the economy often acts based on its animal spirit – keeping self-interest and profit/utility maximization, the self-regulated and profit-maximizing behaviour perhaps drive the production and consumption. Any external agency intervening in such an affair is unwelcome. On the contrary, if anybody behaves irrationally then others do mimic such action and the whole economy ends up in crisis. Getting out of such a crisis indeed possible only through the intervention of external agencies. In a more conclusive sense, as Keynes put up, the government often plays the role of a saviour – someone put the train back on rails. In a nutshell, to correct rational behaviour it requires little stimulus, but irrational behaviour needs a lot of stimulus. Being the Indian economy falls prey to the latter, the evaluation of the stimulus package begs our attention due to the very fact that whether it helps to correct the irrational exuberance.
Packages of the Central Government
Since the maiden budget of Nirmala Sitharaman and the 5 trillion dream, the story of India being one of the fastest growing economies is crumbled and, in a row, she had announced a series of structural reforms, which termed as the stimulus package by media. As we know, the structural adjustment is required when things are irrationally spelled out. To be precise, the reforms she had initiated were 1) Rollback of the tax surcharge on overseas investors 2) Withdrawal of long term and short term capital gains on equities 3) Removal of angel tax on start-ups 4) Intervention in the automobile sector by buying vehicles for government 5) Easing the norms of BS-IV until 2020 6) 700 billion rupees additional capital injection to state-run banks 7) Defining and dealing MSME with a one-time settlement and GST exemption 8) Decriminalizing the default of CSR and increasing accessibility of ADR/GDR fund 9) Credit enhancement for finishing projects such as housing 10) 200 billion for HFCs 11) Rupee volatility will remain or make use for export promotion 12) Offshore rupee market and credit default swap.
In the very outset, these policies are largely to help the shocks in the supply side rather than help to create an incentive in the demand side. That is rolling back of surcharge on overseas investors, withdrawal of long- and short-term capital gains, removal of angel tax to offshore rupee market and credit default swap, in fact, having a view that the current crisis is because of a shortage of production or an issue of supply. On the flip side, the current crisis not prima facie due to supply shock but demand contraction due to joblessness in the past decades aggravated by the global and local slowdown and the recently ineffective policies like demonetization. These events logically squeeze the economy and result in a layoff or reduction in production that again lay off workers and their earning which shrinks the domestic demand and ultimately produce a slower pace of the economic growth.
Recession
Nonetheless, the recessionary mode of the Indian economy is not started in the last quarter but it is almost visible from 2012 onward. In the aftermath of the global economic crisis, and the sovereign debt crisis all across Europe, the major growth driving sector like the services and manufacturing sector started declining in the Indian economy. Though the Indian economy was integrated with the rest of the economy, the immediate ill effect of the global meltdown was resisted by strong stimulus adopted during that period in India. We can observe that most of the current supply-side solutions was also placed in the stimulus packages of the UPA government. Along with this, the UPA was able to bring the Employment Guarantees schemes and other demand boosting mechanism as part of its common minimum program largely influenced by the left. Studies are substantiating that such an intervention, in fact, helped the economy to resist internally along with other policies. Though the band-aid solution or policy of this kind can only postpone the recession to a future date, advisable at least from a Keynesian stand. However, the immediate withdrawal of these stimulus financing by the UPA II amidst of sovereign debt crisis by citing that too much stimulus may inflict debt burden shortened the life of the postponed recession. The result of the withdrawal was a digression from the high growth path and a falling rate of growth ever since 2012. The stimulus withdrawal of UPA marked its false social commitment and its true allegiance to the corporate and the super-rich. The current stimulus offered by Nirmala Sitharaman is not only in the same line of UPA II but irresponsive by denying and neglecting the importance of grassroot demand creation.
Way Ahead
To conclude, the current stimulus package helps largely to amaze wealth among the capitalist class but will create logically no incentive to improve or intervene in the production or consumption by them because they are otherwise incentivized by the government even though their commodities are lying unsold and its resultant loss. If you have more wealth creation without much intervention then you again postpone your strategy of intervention as a rational producer. On the contrary, the consumer or the income-earning class will suffer because of the postponement strategy of the wealthy due to the continuing nature of slowing down which compensated by government financing or incentives. This logic ultimately reflects again in the job market resulting in more layoff and shrinking of more employment and consumption. The result is more recessionary pressure and perhaps cause a slipping into depression. The need of the hour is to address such a recurring effect through effective demand creation which will be possible if the government spend more on employment and other income generative mechanism for the lower deciles of the population. The current withdrawal strategies from schemes like MGNREGS definitely bring more ill effects. On top of it any delay in intervening into the demand creation mechanism may come with a cost, which ultimately deprives the already deprived and the bourgeoisie alike.
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