‘Palliatives aren’t going to work’: Chief Economic Advisor bats against stimulus

“Industry often comes up and says, give us stimulus. If you look at the 2008-’09 period after the financial crisis when there was a stimulus given - unlike, let’s say, in the United States - our institutional checks and balances are not that strong,” said Dr Subramanian.

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“Unless our firms are productive, palliatives are not going to work,” he said.

A DAY after Indian Inc. sought a stimulus package of Rs 1 lakh crore, Dr Krishnamurthy Subramanian, Chief Economic Advisor, Ministry of Finance while speaking at the Indian Institute of Management-Ahmedabad (IIM-A) batted against the move and said, “short-term palliatives are not going to work.”

“Industry often comes up and says, give us stimulus. If you look at the 2008-’09 period after the financial crisis when there was a stimulus given – unlike, let’s say, in the United States – our institutional checks and balances are not that strong,” said Dr Subramanian, while speaking at the two-day conference on “Financial Distress, Bankruptcy and Corporate Finance” organised by the World Bank and the IIMA, on Friday. This is the first conference supported by the newly-established Misra Centre for Financial Markets and Economy at IIMA.

“The quality of investments that happens – often when the government opens its purse – is not necessity, it is as per merit. That can rob a lot of potency from a fiscal stimulus. There is a moral hazard of private profits and socialised losses when you actually intervene. So, this is why I am not a big a fan of intervening too much in a complex market economy,” he said, giving a presentation regarding some aspects of the latest socio-economic survey. Dr M S Sahoo, Chairperson, Insolvency and Bankruptcy Board of India (IBBI) and U K Sinha, former Chairman of Securities and Exchange Board of India (SEBI), were also present at the event.

These comments from Dr Subramanian come after industry leaders in a meeting with Finance Minister Nirmala Sitharaman, on Thursday, sought a Rs 1 lakh crore stimulus package to provide a boost to the investment cycle in the country.

“In 2008-’09 when we grew at high rates, it was driven by investments. If you have to push economic development, then it has to be via investments, especially private investments. Investments enhance productivity, and productivity fosters exports and jobs,” he said, putting the onus back on private entities to make investments and boost productivity.

“Unless our firms are productive, palliatives are not going to work,” he said, adding that exports and jobs put purchasing power in the hands of people, which in turn gives rise to demand. Anticipating this demand, companies invest more, he said.

Speaking about the five-trillion dollar goal of the government, Dr Subramanian said, “The first trillion dollars of GDP that the Indian economy generated took 55 years, which is about Rs 10 lakh crore. In the 2014-’19 period, our GDP increased from 1.7 trillion to 2.7 trillion – an increase of one trillion dollars. However, the exchange rate was far higher at Rs 65 to a dollar, which was Rs 65 lakh crore, which tells you that it (a five-trillion dollar economy) is achievable. What we need is a growth rate of close to 8 per cent to achieve the goal.” He said the current growth rate was around 6.5-7 per cent.