Fiscal Stimulus debate

Why it is in news?

  • NITI Aayog Vice Chairman Rajiv Kumar has pitched for fiscal stimulus to boost growth, with a rider that additional expenditure should be used only for increasing productivity and capital expenditure. 

Need for stimulus

    • Faced with slowing economic growth, the industry has been clamouring for a stimulus package from the government.
    • Additional expenditure should be used judiciously.
    • The finance ministry has pegged the fiscal deficit target for 2017-18 at 3.2% of the GDP and at 3% for the following year. Any fiscal stimulus to boost sagging growth would push up fiscal deficit.

More roads, airports

    • Various experts have argued against fiscal stimulus as it would jeopardise the fiscal consolidation programme.
    • On apprehensions about the stimulus, Mr. Kumar said: “It depends on how you increase government spending. If you... throw money away and give doles then, yes, of course it will give [the] wrong signal. But if you are doing that by increasing productivity and capital investment by making, for example, more roads, more airports, more railways, nobody can argue that this will give a bad signal.”
    • Stimulus money should be used on increasing investment, increasing demand and improving physical and rural infrastructure.

What other bodies think?

    • The newly constituted Economic Advisory Council to the Prime Minister wants the government to stick to its fiscal consolidation road map and has suggested that stimulus to the industry should not be at the cost of fiscal prudence.
    • The RBI had cautioned the Centre against a stimulus package to revive sagging growth, arguing that breaching the fiscal deficit target will fire up inflation and hurt long-term macroeconomic stability.
    • As at August end, the government has already run up 96.1% of its fiscal deficit targets for the year 2017—18 as it has advanced spending on core infra sectors like roads, ports and railways.
    • Brokerage firm Nomura has warned that the present macro problems are due to higher spending, not a lack of that.
    • It has also argued that they are not due to low revenue receipts either, hence a pump priming may be counterproductive this time around. 

What is fiscal stumulus?

  • Economic stimulus consists of attempts by governments or government agencies to financially stimulate an economy.
  • An economic stimulus is the use of monetary or fiscal policy changes to kickstart growth during a recession.
  • Governments can accomplish this by using tactics such as lowering interest rates, increasing government spending and quantitative easing, to name a few.

Posted by Jawwad Kazi on 17th Oct 2017