I am getting alarmed at the pre-Budget chatter. There is talk of imposing a COVID-cess to suck in extra revenue. Picking up clever leaks, pink papers have begun labeling it a “Keynes-inspired expenditure budget” where big outlays on healthcare and infrastructure will “bootstrap our economy back to growth”. On cue, the commentariat is revving up a tiny but rising applause, how “an unprecedented infrastructure push under the New Deal in 1935 created millions of jobs and regenerated regional economic development in the US. India must seek inspiration from this”.
Now now, please don’t get me wrong.
I believe that a massive fiscal stimulus is imperative for our economy to shake off its funk. I also believe that FDR’s New Deal rescued America from its post-depression blues.
No quarrel with either of those assertions.
False Equivalence Between Fiscal Stimulus & Higher Govt Expenditure
But I am equally convinced that our State has displayed an extremely poor capacity to execute economic plans. The Government of India has not been able to:
- Sell an airline for nearly half a decade now
- Build second airports at Mumbai and NCR (national capital region) for over a decade
- Get its first bullet train on track
- Achieve critical size for the Delhi-Mumbai freight corridor over decades
- Make Ahmedabad’s GIFT look like London’s Canary Wharf, except in brochures
- Even sell scrips, forget about building physical assets – in 10 out of the last 12 years, it’s fallen way short of its disinvestment target, with the current year recording the most abysmal miss, despite the private sector picking up a record Rs 1.7 trillion from a roaring stock market
So, when a fiscal stimulus — which I unreservedly support — is equated “whole-ly and sole-ly” with “stepped up government expenditure”, I turn truant. In my book, anything that calls for “increased government activity” is an oxymoron doomed to failure.
What the economy needs is a quick and immediate injection of stimulus.
Instead, what a “stepped up government expenditure” will do is create a ton of red tape and paper — files, bids, tenders — without breaking any new ground. Yes, several months and years later, a few shovels, cranes, and earth-movers will begin to stir, but now, in the current year, it shall merely be sound and fury signifying nothing (apologies for taking recourse to William Shakespeare and not his other illustrious compatriot, John Maynard Keynes).
That’s my core objection – I violently disagree with the false equivalence between a fiscal stimulus and higher government expenditure.
Dispassionate, Clinical Diagnosis of the Economy
I believe a dispassionate, clinical diagnosis of the economy shall bear me out. Let’s do that with the government’s own data released by NSO in the first advance estimate of GDP for this year:
- It’s a massive contraction of (-) 7.7 percent, the biggest since 1952, with seven out of the eight reported sectors ‘de-growing’, wiping off Rs 30 trillion of nominal economic output. For those of you who love stats, the projected GDP was Rs 225 trillion, while we are likely to hit only Rs 195 trillion
- Investments have shrunk by a near-fatal (-) 14.5 percent; while private consumption expenditure has fallen off a cliff by (-) 9.5 percent. Clearly, the heart and lungs of our economy are terminally sick
- Mirroring this plunge is a (-) 9.4 percent drop in manufacturing – coming on top of last year’s ‘growth’ of 0.03 percent, that makes for the perfect storm; to add to the tempest, the usually dynamic services sector has hollowed out by (-) 8.3 percent
- Ironically, companies have posted strong profitability, but there’s a sting in this tail too, as costs and wage bills have been slashed. What’s the crippling impact? On consumption, of course
- Per capita incomes have fallen by over 5 percent, reducing nearly Rs 1000 per month per average Indian (again, for stats’ lovers, the fall is from Rs 1.34 lakh to Rs 1.27 lakh per capita income); if you juxtapose this against the fact that 14.7 million jobs have gotten killed in 2020 versus the previous year, even as farm output has gone up, you can figure out the epicentre of extreme distress, that is, in urban and semi-urban consumption while rural buyers are holding up the sky from crashing
Swivel Towards Tax Cuts & Cash Transfers for the Perfect Fiscal Stimulus
So, if we confine our stimulus to ‘greater government spending’, we would be scatter-shooting a barrage of dud bombs — dud because they are timed to explode several years later, while the economy needs the stimulus to fire now. Therefore, instead of bloating up the State, we need to swivel towards alternatives like direct cash transfers and tax cuts which can be laser focused on urban consumption and industrial investment.
Now, I daresay that this is what the Perfect Fiscal Stimulus could look like:
- Each income-tax payer is given a ‘special expenditure voucher’ of, say, up to Rs 5 lakh, which has to be used to buy some product or service before 31 March 2022 such that the ‘expensed voucher’ can be deducted from taxable income. This would incentivise everybody to go out and buy something, whether a house or holiday or car or high-end smartphone or desktop computer or whatever — in fact, the higher your tax bracket, the more likely you would be to buy a high value item
- An aggressive depreciation cover is provided for an industrial plant/equipment bought in the current year. For example, you could permit a 3-year write off for assets whose useful life is, say, 25 years. This would push capital formation on a very large scale
- Finally, indirect taxes could be slashed by a hefty fraction — say 33 percent or 50 percent — for a limited window, perhaps for six months or the whole financial year. This would be inspired by the stamp duty cut of 60 percent authored by the Maharashtra government for a 3-month window last year, which magically infused life into Mumbai’s comatose property market
The above are exaggerated examples to create impact. But the principle is clear:
- We must create an unusual amount of purchasing power, an extraordinary capacity, for ordinary consumers via an unprecedented double-barrel of lower taxes and prices
- We should do this for a limited period so that buyers have to rush to encash temporary benefits
Yes, the government’s tax revenues will fall, but don’t worry — that’s the fiscal stimulus!
Instead of a few hundred bureaucrats trying to impossibly build new roads and bridges in the current year, we would be egging tens of millions of empowered consumers to buy what they want and need. That will create an organic groundswell of demand from below, rather than some sort of fiat or imposition from above. I can bet my last penny that economic growth will get back on steroids.