John Samuel Raja D: IMF versus Moody's

With every country attempting to spend its way out of the current crisis, the question is what type of expenditure gives the best results. Some time back, the IMF came up with an answer for the G-20 countries — it said infrastructure investments gave much better results than, say, tax cuts that left more money in the hands of consumers. In the current context of consumers too scared to spend, the IMF said a one rupee tax cut would result in a 60 paise boost to GDP; the same one rupee, if spent on creating infrastructure, however, would lead to a Rs 1.8 hike in GDP. Not everyone, however, agrees with the IMF; and rightly so, since the impact depends upon the structure of the economy.

Private consumption, for instance, forms 60 per cent of India’s GDP as compared to around 40 per cent in China — in which case, stimulating private consumption will have a greater impact in India in comparison with China. Tine Olsen of Moody’s Economy.com points out that countries like India which have a high propensity to consume would do better to stimulate private consumption through tax cuts and cash transfers. Taiwan, which has a lower propensity to consume than India does, has given a shopping voucher worth $108 to each of its citizens. Given that the number of taxpayers in India are still quite limited, a shopping voucher will clearly have better results as compared to a tax cut. But the leakages in administering the voucher could mean its efficacy could get lowered considerably. The government would do well to keep this in mind while deciding the next stimulus package.