In the wake of crises

The fiscal stimulus package of Rs.30,000 crore has been introduced by the government over the weekend to enhance the infrastructure sector. Now the question arises: Is this minimum or appropriate the government could do in the wake of the economic downtown? The aggregate fiscal package till now in the current year is $6 billion or 0.6% of the GDP. China, world’s fourth largest economy, just announced a $586 billion package or 18% of the GDP!
There’s a major debate on how the slack in demand for goods and services can be retreated. The fiscal stimulus package announced recently is for the infrastructure sector. There’s a growing nexus between what should be the amount of the fiscal package and the ways in which it could benefit the affected. An increase the spending over receipts creates a fiscal deficit which requires prior permission from the government if it goes beyond the planned deficit. Some amount of deficit in the economy stimulates demand but if the deficit continues for a larger period, the burden on the government increases, who finances it through the borrowings from internal and external sources. Investing in infrastructure is a risky affair because it may or may not increase consumption through a multiplier effect. Also the allocation of funds inside the infrastructure sector is not known which makes it unclear for the private investors as to where the funds are to be invested. Investment gives an opportunity to the people who are associated with the projects to increase their consumption which forms a major part of their income. Now, whether the increase in the incomes of the people leads to increased consumption remains a debatable issue. India, following a policy of neo-liberalization may escape the exact Keynesian view of stabilizing the economy; however, after the 1991 reforms where private sector emerged as a major player, Keynesian view cannot be knocked for a six. John Maynard Keynes brought a revolution in the history of economics in 1930s with his idea of combination of more government spending and tweaking taxes that will put more money in people’s hands. His major assumption was of a capitalistic economy where the government sector too played some role. Spending of the government in infrastructure sector is a component of the government spending, which in turn is the major component of the aggregate demand of the Keynesian theory. An increase in the government spending raises the interest rates which may lead to decline in investments. What needed is increasing the government spending while maintaining stable interest rates in the economy.
Interest rates can be adjusted by the central monetary authority which is Reserve Bank of India. Reserve bank adjusts the supply of through various options available like CRR, SLR, repo rate, reverse repo rates etc. An increase the interest rates reduces the demand for money in the economy because the interest bearing assets like bonds and debentures becomes more attractive and holding money becomes dearer. Interest rates play a major role since the money market is in immediate action in contrast to the lagged fiscal reforms.
What required is a policy-mix in action that spurs the growth and takes the economists by surprise by projecting a growth rate higher than expected. Also the restrictive labor laws needs to be made flexible to ensure greater flexibility and mobility of the labor. Flexibility of labor indeed doesn’t mean ‘hire and fire,’ it just means that greater attention is needed to provide security to the labor force. In the wake of deep crises, India would surely emerge as the fastest growing economy leaving China in the dust.