It has to be done, Smartly

The Economic Times     26th October 2020     Save    

Context: The recovery from shocks administered to demand and supply by COVID-19 has some short-term questions in-store, regarding the need for fiscal stimulus, its quantum and form.

Arguments for the need for fiscal stimulus:

  • Help tackle weakening of demand: The current account surplus of 3.9% of Gross Domestic Product (GDP) shows that total domestic expenditure, consisting of consumption, investment and government spending, falls short of domestic supply. 
  • Restoration to normalcy time: While there are apprehensions of adding debt, a fiscal stimulus will raise GDP, which will bring debt-to GDP ratio down, shoring up revenues and defraying additional interest payments.

The extent of the Fiscal Stimulus: Given all kinds of uncertainties associated with Covid-19 and a need to sustain a current account deficit (necessary for investments), a pragmatic target for the stimulus maybe 2% of GDP.

Form of Stimulus:

  • Bigger part to the infrastructure: and perhaps the urban housing as such spending will create jobs.
  • A one-time cash transfer to both rural and urban poor: Transfers could be made more effective if they could be channelled through coupons with an expiry date. 
    • For each rupee spent via the coupons, households can reduce a rupee’s worth of expenditure out of their regular income. 
    • The marginal propensity to spend is high among the poor in normal times, and normalcy is being gradually restored, we can count on them to spend a significant part of the transfer. 
  • Recapitalization of Public Sector Banks (PSBs) in addition to greater autonomy in decision making and faster resolution of non-performing assets (NPAs).