Combating the slowdown in our economy

That the government too is worried about the economy is obvious from the series of meetings the finance minister has been holding—with automobile barons, bankers, realtors and others.

Published: 13th August 2019 04:00 AM  |   Last Updated: 13th August 2019 07:44 AM   |  A+A-

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For representational purposes (File Photo | Reuters)

Sucked into an economic slowdown of alarming proportions, the Indian industry has sought a Rs 1 lakh crore stimulus package, over and above the Budget that the Centre announced recently, to help revive demand and create fresh jobs. That the government too is worried about the economy is obvious from the series of meetings the finance minister has been holding—with automobile barons, bankers, realtors and others.

The big question that arises from all this churn is: Will the Centre bite the bullet and accept the Keynesian dictum that the only way to reverse a slowdown is to spend one’s way out of it? Indications are it will, but only to a limited extent. The government’s ability to give tax sops that could give consumers some money in hand is limited by the fact that tax collection targets set for this year are possibly too ambitious. Non-tax revenue targets including money that may be raised from disinvestment and auction of telecom airwaves may be difficult to meet given the turbulence in stock markets worldwide.

As inflation rates are still benign, the Centre may be tempted to borrow more to fund a spending spree on infrastructure projects to help beat the recession. Its economic policy advisors are believed to be in favour of this route. There is talk of front-loading infrastructure investment plans, especially in sectors that give quick returns—such as rural and urban housing, roads, minor irrigation works, etc. An infrastructure push has the merit of being able to create a demand cycle for cement, steel and other materials needed. Which in turn means money would be circulated to other sectors of the economy as well as passed on to workers who get jobs in these projects.

However, any expansion of state borrowing also risks pushing up inflation rates beyond RBI’s self-set target of 4%. For policymakers on Raisina Hill in New Delhi and on Mint Street in Mumbai, this will be the real challenge—to spend in a large-scale fashion on infrastructure without allowing consumer inflation to go haywire.

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