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Deploy stimulus to revive economy or face stagnation, caution analysts

The central bank has already chopped 135 basis points off its key lending rate, but this has failed to spur demand

Reuters  |  Mumbai 

Fiscal stimulus needed to revive economy, avoid long stagnation: Analysts

India has depended on to support its economy growing at its slowest pace in six years but the government must now deploy more direct fiscal stimulus or risk a long period of stagnation, analysts and experts say.

Growth in Asia's third-largest economy has been hit by weak consumer demand and slower government spending amid pressures from the Sino-U.S. trade war, and more recent economic data suggests growth could fall further.

The central bank has already chopped 135 basis points off its key lending rate, but this has failed to spur demand.

In an opinion piece in The Hindu newspaper on Monday, former Prime Minister Manmohan Singh - the architect of the liberalisation of India's economy - wrote the government needs to "act quickly to restore consumption demand through measures since the impact of seems muted."

He warned the economy risks stagflation - high inflation combined with stagnant demand and high unemployment - if it fails to act.

Other economists agree. "It's not a question of debate, it has now become imperative," said Rupa Rege Nitsure, chief economist at L&T Financial. "We need to keep aside all other considerations and work in the interest of growth."

While the government has announced various sector-specific measures and a cut in corporate taxes, economists note it has not directly addressed the widespread weakness in consumption demand - the main economic driver in recent years.

Economists and analysts say it is time to loosen the purse strings and let the fiscal deficit climb above the targetted 3.3% until the economy is back on its feet.

Subsequently, calls are growing for direct cash transfers to the rural economy and even cuts in income taxes to boost demand.

Large fiscal stimulus has in the past lead to a spike in inflationary pressures, but economists say consumer price inflation has stayed within the central bank's mandated 2%-6% range.

Annual retail inflation rose to 4.62% last month, breaching RBI's medium term target of 4% for the first time in 15 months but core inflation fell sharply suggesting the rise is likely a blip and not broad-based.

"If someone is suffering from cancer and doctors concentrate on controlling his sugar or other ailments, that's wrong. They have to administer chemotherapy despite the fact it has many side effects," Nitsure said. "We can control the side effects, but first we must eradicate the infection from the system."


First Published: Mon, November 18 2019. 19:06 IST