Economic Recovery Needs Government Funded Stimulus Here And Abroad

Economic Recovery Needs Government Funded Stimulus Here and Abroad

International Monetary Fund (IMF) Chief Ms. Christian Lagarde has recently cautioned the countries across the world against withdrawal of stimulus and other unconventional monetary policies designed to prop up weak economies.

Ms Lagarde says the reduction of stimulus should wait till enough is known about the pace of recovery. Stimulus withdrawn too soon could affect financial stability and cripple the nascent growth, she feels.  These are wise words indeed applied to the US, Europe, Japan, and other areas that have adopted the policy of propping up their economies till they are healed. For Japan, stimulus has been in place for over two decades already; for Europe and America, inclusive of periodic large bailouts, ever since the economic crisis overwhelmed their economies since 2008.

But they, the stimulus programmes have collectively prevented a catastrophic collapse of even their smallest economy. There is no 1930s style Great Depression despite many privations such as high unemployment, uncompetitiveness, and stagnating commerce.

India has chosen to hobble its growing economy instead, since 2008, when our GDP was at a healthy 8% plus, in favour of a futile attempt at controlling inflation, but the resultant monetary policies have resulted in an economic crisis of alarming proportions today.

Now GDP growth has fallen to under 5% and slowing, the fiscal and current deficits are out of control and rising sharply. There has been an unprecedented 13% to 15% drop in the rupee’s value in a matter of three months, runaway inflation is threatening further dislocations, corporate distress and large job losses. There are huge NPAs in all the Government banks, a crashing, depressed stock market, and very low economic confidence all around.

And since there is no large scale spending on infrastructure, quite apart from no investment in business or industry because of very high interest rates, the situation is akin to undeclared stagflation.

There are those in India, and amongst those observing the economic crisis in this country from abroad, that think it should apply for a massive bail-out from the IMF as soon as possible to try and set things right; and before the economy of this country weakens further.  

The IMF will naturally lay down conditions that may fly in the face of the creeping protectionism, the raising of tariff barriers and taxation, the isolationism that Indian policy makers have been resorting to lately.

The IMF may also demand that we free the currency by going fully convertible, amongst several other demands designed to stimulate growth. This would make it comfortable once again for foreign lenders to invest in India. But it might mean curbs on the hugely increased welfare programmes including the Food Security Ordinance/Bill.

It would also probably address many of the restricted areas which are not available to foreign capital investment, and occasion lessening of controls and limits on other sectors which do let FDI and FII in, but with a number of curbs. In other words, it would force a forward movement on the stalled economic reforms.

The Indian authorities are not keen on going to the IMF because of its political implications, even as they have appointed Mr. Rajan, formerly with the IMF, to the RBI. Another familiar face,  Mr. Kaushik Basu, currently with the World Bank, and formerly advising the Government of India, has said India can avoid going to the IMF for now. This is giving intellectual heft to the Government’s stance, precarious as the situation is, just as Mr. Amartya Sen’s views gave cover to the Government’s welfare programmes.

Meanwhile, judging from recent developments, the Indian economy will continue to react badly to changes in monetary and fiscal policy in the West as they come.

This, even as the US is reportedly thinking of tapering off its massive $85 billion per month purchase of treasury bonds and mortgage-backed securities to aid the US economy towards recovery.

The remarks from the US Federal Bank Chairman Ben Bernanke, made in May 2013 and since, vaguely suggest that this tapering process might begin from next month, September 2013.

This has partially resulted in a marked flight of capital from the emerging markets and resultant pressure on their fiscal and current account deficits. It has also weakened almost all emerging market currencies against the US dollar.

The US dollar itself may be technically over- valued against fundamentals of the American economy, but since it is the main currency of global trade, it continues to be in constant demand. This demand for the greenback promotes its valuation vis- a- vis other convertible and non/partially convertible currencies.

While in a global environment there is an automatic impact of global trends on the domestic economy, there is no excuse for not kick-starting the stalled growth in India by any means at the Government’s disposal. Not doing this is going to make the real economy much worse no matter how many monetary tactics are employed by it.

This, for a   cash- strapped Government is a tall order. But, if it goes to the IMF and World Bank and asks for money to fund infrastructure and rapidly puts it to use, it will provide the necessary stimulus to the domestic economy to get it going again. But does this Government have the will to do anything like this in the time it has remaining?

(879 words)

August 25^th, 2013

Gautam Mukherjee