A fiscal road map

Govt must decide fast on the timing and amount of stimulus

The government has not yet decided either the amount or the timing of another fiscal stimulus to revive the economy, Union Finance Minister Nirmala Sitharaman told this newspaper in an interview on Wednesday. This is surprising, considering that time is indeed running out. The ambivalence is clearly reflected in the government’s borrowing plan for the current year, which has been left unchanged at Rs 12 trillion this week. The government is of the view that with an improvement in revenue collection, it would not require additional borrowing during the year. However, this will obviously change once it decides to increase spending to revive demand. Borrowing at the current level is unlikely to leave much for additional spending. Although the economy is gradually recovering after the nationwide shutdown, most private-sector economists expect a near double-digit economic contraction in the current fiscal year. The finance minister’s statement clearly indicates that the government is yet to fully assess the current economic situation. 

The Indian economy contracted by about 24 per cent in the first quarter of the current fiscal year and output is expected to have witnessed a double-digit decline in the second quarter as well. Now that the first half of the financial year is over, the government has enough data to make a realistic assessment. This will help ascertain the kind of support the economy needs. It would then be critical to evaluate the extent to which the government can stimulate economic activity, and how the required resources can be raised with minimal market disruption. The government has increased its borrowing target by over 50 per cent compared to the Budget estimate, and public debt is likely to go well over 80 per cent of gross domestic product in the current fiscal year. It is important to recognise that both overall economic and fiscal stress will not end with the financial year.

Thus, the government will need a clear road map for fiscal intervention to maximise its impact on the economy. It would do well to work swiftly in this direction, preferably with a panel of external experts. Now that the economy has been opened up to a large extent, the government should start using whatever fiscal space available at the earliest. This will contain the damage and help revive economic activity. Further, a clear road map will help all stakeholders. For instance, financial markets would know what to expect. As things stand today, there is confusion in the markets, which believe the government is just postponing the inevitable on increasing its borrowing to support economic activity. The Reserve Bank of India will also be in a better position to make necessary interventions to conduct the borrowing smoothly. Moreover, a clear target will help the government itself. Depending on the need, it can work on a combination of instruments like asset sales and borrowing from domestic and international sources to raise resources. A more proactive approach to economic management is required, given the intense impact of the pandemic. This is indeed an unprecedented situation and the government’s response might need to be constantly refined. But delays in decision-making would only complicate matters.