The Union government’s latest fiscal stimulus package was needed, as evidence of a readiness to counter the ongoing downtrend in the current economic cycle. Seen in conjunction with Saturday’s reduction by the Reserve Bank of India of key interest rates, in addition to the cuts of earlier weeks, it goes some way in sending the needed signal that policy makers are alive to the situation and ways to address it. The four per cent slash in central value added tax is particularly welcome. Since this covers most consumer goods and intermediate ones like cement and steel, it will have an effect across the board, more so since part of the import duty structure is pegged to these. A direct subsidy package to exporters, of around Rs 1,800 crore, is part of the deal and the yells of too little and too late were predictable; more might have to follow. All this comes with the various riders typical of our system — state governments, for instance, ought to follow with their own deep cuts in excise, which won’t happen. And pushing through the promised extra Rs 20,000 crore of plan spending in this fiscal year is most unlikely; the machinery is slow and creaky.
Yet a key rationale in such announcements is to send the right signal and address the mood, before pessimism feeds on itself. In that sense, the central government hasn’t been idle since the US plunge and related share market crises.
Where they deserve a kick, if not several, is for the four wasted years when the domestic and world economies were booming. They could have used that period of jumping revenues and investment optimism to set the fiscal house in order, giving themselves far more room to handle the inevitable downturn. They took it easy on subsidies, ballooning spending and administrative/ governance reforms; so did almost all states. The perennial problem of relating spending to desired outcomes was mentioned in the 2004 Budget and after, too; little was done to address it. If it had, we could have had much more room and capacity to absorb a much larger stimulus now, and be surer of it moving in time to intended targets.
As it is, the various measures will double the targeted fiscal deficit, in a system already very far in the red. On the brighter side, that makes little difference now, domestic GDP growth should still be seven per cent and the central levers are certainly active.
Source : Expressbuzz