Fiscal stimulus- not enough

Hmm... so we have a fiscal package at last on top of the monetary stimulus.

• The government will spend Rs 20,000 crore on infrastructure, industry and exports
• Excise duty cuts will cost approx Rs 10,000 crore
• India Infrastructure Finance Company Ltd will raise Rs 10,000 crore in tax free bonds to support spending on highways.

All this is good but, in my view, not good enough. The present situation requires a much stronger response. The government appears inhibited not just by the FRBM provisions and its anxiety to revert to its limits at the earliest but also by impending elections. Let the next government (which, many think, will be a non-Congress government) tackle the mess, the government seems to think. There are also some who seem to believe the economy will somehow right itself in about six months' time, so no big initiatives are required.

I think this is a wrong-headed approach. We must prepare for the present crisis to unwind over two years and plan accordingly. Once you accept a two year horizon, the objections about infrastructure projects being of long gestation get blown away. Also, we need not think only of ports, airports and power. There are umpteen smaller things to be done in the rural areas, not glamorous but essential and labour-employing- warehouses, storage tanks, minor irrigation, etc

I wrote at length about this in my last column in ET, Crisis: bring in the politicians. My sense is that you need grassroots mobilisation in a crisis of this kind. It is at the state and panchayat level that the spending has to take place, it is there that a sense of urgency must develop, plans drawn up, tightly supervised and executed. The politician will take his cut but he will get things done because he is the guy who has to face the mob as the full weight of the crisis descends on the Bharat that is India.

Many in government seem to draw comfort from the fact that even a 7% growth rate sounds good in absolute terms. But, in terms of the impact on the economy and society, a deceleration from 9% to 7% can be as painful as a deceleration from 2% to 0% in the west. Just look at the migrant labour in Mumbai's construction industry heading back home in recent months. Industry is staying its hand on lay-offs but a few more months of a slowdown and you will see lay-offs happening in the organised sector. Job losses in the unorganized sectors, such as textiles, are said to run into thousands.

There is a crisis of confidence. Only a massive burst of government spending can restore confidence. The present stimulus is inadequate, I'm afraid.