Budget 2021: Everybody’s Hollering For The Wrong Kind Of Fiscal Stimulus
Traders shout and argue outside the BSE building. (Photographer: Santosh Verma/Bloomberg News)

Budget 2021: Everybody’s Hollering For The Wrong Kind Of Fiscal Stimulus


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 labelling 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 U.S. 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.

Budget 2021: Everybody’s Hollering For The Wrong Kind Of Fiscal Stimulus

False Equivalence Between Fiscal Stimulus And Higher Government 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 the 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; and
  • 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 lakh crore 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 earthmovers 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 the National Statistical Office in the first advance estimate of GDP for this year:

  • It’s a massive contraction of 7.7%, the biggest since 1952, with seven out of the eight reported sectors ‘de-growing’, wiping off Rs 30 lakh crore of nominal economic output. For those of you who love stats, the projected GDP was Rs 225 lakh crore, while we are likely to hit only Rs 195 lakh crore.
  • Investments have shrunk by a near-fatal 14.5%; while private consumption expenditure has fallen off a cliff by 9.5%. Clearly, the heart and lungs of our economy are terminally sick.
  • Mirroring this plunge is a 9.4% drop in manufacturing – coming on top of last year’s ‘growth’ of 0.03%, that makes for the perfect storm; to add to the tempest, the usually dynamic services sector has hollowed out, contracting 8.3%.
  • 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%, reducing nearly Rs 1,000 per month per average Indian (again, for stats’ lovers, the fall is from Rs 1.34 lakh to Rs 1.27 lakh); if you juxtapose this against the fact that 1.47 crore 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, i.e. in urban and semi-urban consumption while rural buyers are holding up the sky from crashing.

Swivel Towards Tax Cuts And 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 March 31, 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 three-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% or 50%—for a limited window, perhaps for six months or the whole financial year. This would be inspired by the stamp duty cut of 60% authored by the Maharashtra government for a three-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.

Also read: Budget 2021: Dear FM, Listen To A ‘Fiscal Heretic’, Cut Taxes!

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!

Epilogue: 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.

Raghav Bahl is the co-founder and chairman of Quintillion Media, including BloombergQuint. He is the author of three books, viz ‘Superpower?: The Amazing Race Between China’s Hare and India’s Tortoise’, ‘Super Economies: America, India, China & The Future Of The World’, and ‘Super Century: What India Must Do to Rise by 2050’.

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