Over the past week, Finance Minister Nirmala Sitharaman unveiled a series of measures to help ease the stress in different sectors of the economy across the country. But the announcements have failed to reassure or enthuse, pointing to a chasm between expectations and reality. The actual fiscal outgo is likely to be around only 1 per cent of GDP, far short of the proclaimed 10 per cent. The government’s conservative approach seems to be driven by several factors. First, as there continues to be uncertainty over how long it will take for the pandemic to be brought under control, and how economic activity will shape up over the coming weeks and months, it is difficult at this juncture to make a reasonably accurate assessment about the state of the economy, and thus arrive at an estimate of the breadth and depth of the government intervention that is needed. As Sitharaman said in an interview to this paper, “It’s too early for me to make an (assessment), it’s too early for me to even hazard a guess”. There appears to be an inclination, then, to keep the power dry for now.
There also appears to be a strong desire on the part of the government to avoid the mistakes made in the aftermath of the global crisis of 2008. The consequences of continuing with the stimulus for too long, which stoked demand, and proved to be inflationary, leading to the taper tantrums in 2013, are still etched in memory. Yet, having said that, with demand collapsing, and unlikely to recover meaningfully in the near-term, and inflation barring temporary supply-side disruptions unlikely to firm up, sooner or later the government will have to firm up its plans. All options, including the possibility of monetising the deficit, may have to be on the table as the measures announced so far are unlikely to change the near-term growth outlook meaningfully.
It is true that the extent of uncertainty is unprecedented. But revisiting the budget revenue and expenditure numbers only at the time of presenting the revised estimates might not be a prudent approach. Instead, the government should present a short-to-medium term fiscal roadmap that provides a realistic assessment of the state of the economy. It should clearly lay out how it intends to support the economy during this period, its expenditure priorities, as well as a clear plan for funding its deficit.
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