What would be the best stimulus?

Here are a few things to keep in mind while the government ponders its stimulus options. 

The foremost is that India has found itself in this situation thrice before. 

The first was between 1966-69 after two successive wars and two droughts. The second was between 1979-1981 after a massive drought and the huge second oil shock. The third was between 1990-92 after the First Gulf War and a runaway fiscal deficit. 

At the end of the 1960s needing money, the government nationalised 14 banks.  At the end of the 1970s, it steeply raised indirect taxes. It also cut back on its capital expenditure.  At the beginning of the 1990s, it again opted to cut its own expenditure. But it left taxes unchanged. 

These were the immediate paramedic responses. The proper medical responses were different.  In the first three years of the 1970s the government raised direct taxes steeply. At one point the marginal rate was 97 percent. 

Then in the first three years of the 1980s it resorted to a huge loan from the IMF. Taxes were left broadly as before. But six more banks were nationalised. 

In the first three years of the 1990s the government once again borrowed a huge sum from the IMF but this time it also invited foreign savings in. Industrial delicensing had little to do with government finances but hugely energised the economy. 

Points for action 

Two patterns emerge from this very brief recap. 

One, and this is crucial, the Indian economy goes for a toss at the end of each decade. The 1950s and the 2000s were no exceptions. 

And, two, faced with such huge crises, government intervention tends to be to raise money to meet current expenditures. Investment is the last thing on its mind. 

Will it be different this time? This is the question that Mr Modi must confront squarely. He must decide whether it’s a going to be a demand side intervention or a supply side one and, if it’s going to be both, what’s the best combination. 

Thus, will the stimulus that now seems imminent be focused on investment or consumption? Also, is hugely enhanced expenditure on defence consumption or investment?
 

The received wisdom so far is to focus on consumption which is ok up to a point. But the real answer lies in increasing investment expenditure. 

The lockdown and its gradual lifting have shown that (a) people are happy with consuming less, and (b) GST revenue is back on track even without a consumption/demand stimulus. 

Politically, however, a consumption-cum-mood-changing stimulus may be necessary. 

I think this should come from on the income tax side. Two things can be done in this regard. 

One, give up back tax claims of less than Rs 25 lakhs. Just write it off because most of it’s not realisable anyway. This will immediate lead to joy, happiness and expenditure. 

Two, change income tax rates to 10 percent for those earning up to Rs 50 lakh a year; 25 percent for those earning up to Rs 2 crore a year; and 35 percent for those who earn more than two crore a year. 

I feel certain that the bounce in GST revenue will make up for the loss of personal income tax revenue. 

After all, if this can be done for the companies, why not for individuals? If that was ‘structural’ reform, so would this be.