Why the govt's economic package cannot be classified as stimulus

Real stimulus would be to tax people less because spending is as much about feeling good, as it is about having the money and depressed people don't go out shopping

Is there a danger that the government, seeing the economic revival and the relaxing of tensions with China on the LAC, might become complacent?

I ask because last week, at the time of announcing the third economic package, the finance minister said the stimuli injected by the government so far amounts to 15 per cent of GDP. That’s quite a lot of money, around Rs 30 trillion. Some questions do, however, need answering.

The foremost of these is the government’s definition of stimulus because that term has a specific meaning in economics and most of the steps announced in the May ‘Aatmanirbhar Bharat’ series were relief measures, such as emergency working capital for MSMEs, free food for the poor, credit to street vendors, to name just a few.

These were all needed for survival, but weren’t really a stimulus. Other steps, such as the change in the definition of MSMEs, or opening up the coal, minerals, defence and space sectors to the private sector, were more in the nature of medium-term reforms. Again not quite a stimulus.

It was only in Aatmanirbhar Bharat 2.0 that any real stimulus measures were announced. But they were tiny.

Thus, exhorting central government employees to spend more was sensible but their numbers are so small as to not matter much, if at all. Besides, the benefits were postponed, while the costs were immediate. And now we have the third tranche of announcements. These are again mostly relief measures -- necessary but not quite sufficient.

Stimulus in economics

Stimulus in economics has a very specific meaning. It is the extra amount over the budgeted expenditure spent by a government — with the proviso that the fresh expenditure is incurred (a) by it borrowing more to (b) allow excess industrial capacity to be used. If both conditions are not met, it’s expenditure alright but it’s not quite a stimulus.

Secondly, a stimulus in the Keynesian system is supposed to be like a booster shot. It has to be spent quickly in order to equilibrate the different sectors of the economy.

But what the government has been announcing since May is more like a series of medium term maintenance doses for a patient with a chronic illness.

Third, the purpose of a stimulus is to put income in people’s wallets as the direct cash transfers indeed do. True, they aren’t much at Rs 500 per DBT account per month. But they are better than zero.

Fourth, where’s the stimulus in giving money to those who will spend it on non-industrial products like food? This is good politics, but is it good economics?

Fifth, can an easy money policy be described as a stimulus in the Keynesian sense? Everyone knows that monetary policy has its limits because of the horse-and-water problem: the damn thing will not drink.

In any case, when industry contributes less than 15 percent to GDP, however much it borrows it isn’t going to be enough to quickly – repeat quickly -- make a major difference to the level of demand. This becomes more of a problem because of the efficiency-inducing measures during the lockdown. These have probably enhanced total factor productivity but that also means lower demand for inputs per unit of output.

Cut income tax

So in the end we have to go back to the question the late Mr Jaswant Singh, when he was finance minister, asked me in January 2004: how do I put money into people’s pockets.

Tax them less, Sir, I replied. Make them feel good.

The same thing still applies because spending is as much about feeling good as having the money for it. Depressed people don’t go out shopping.

Twitter: @tca_tca