More Government Expenditure Is NOT the Best Fiscal Stimulus

If the fiscal stimulus simply or merely means an increase in government expenditure, then I am totally unconvinced.

Raghav’s Take: How to create the perfect fiscal stimulus 

(Photo:The Quint/Kamran Akhter) 

Video Editor: Vivek Gupta
Video Producer: Sonal Gupta
Cameraperson: Athar Rather

You’ve heard that joke about economists, right? If there are five economists in a room, then there are six opinions – that’s how fickle and contradictory economic opinion is supposed to be! But there’s one thing on which even if there are five economists in the room, there is only one opinion – India needs to inject a serious fiscal stimulus if her economy is to shake off its current funk.

However, if the fiscal stimulus simply, rather merely, means an increase in government expenditure, then I am totally unconvinced, because the State has displayed an extremely poor capacity to execute economic plans.

Govt of India Has Not Been Able to:

• Sell an airline for nearly half a decade now;
• Build second airports at Mumbai and National Capital Region (NCR) for over a decade;
• Get its first bullet train on track;
• Achieve critical size for the Delhi-Mumbai freight corridor over decades;
• Make Ahmedabad’s GIFT look like London’s Canary Wharf, except in brochures; and
• Even sell scrips, forget about building physical assets – in 10 out of the last 12 years, it’s fallen way short of its disinvestment target, with the current year recording the most abysmal miss, despite the private sector picking up a record Rs 1.7 trillion from a roaring stock market.

So, the fear is that if we only try to “step up government expenditure”, then it will just create a ton of red tape and paper – files, bids, and tenders – without breaking any new ground. Therefore, instead of bloating up the State, we need to swivel towards alternatives like direct cash transfers and tax cuts, which can be laser focused on urban consumption and industrial investment.

How to Create the Perfect Fiscal Stimulus

Now, I daresay that here is a way to create the Perfect Fiscal Stimulus:

• Each income-tax payer is given a “special expenditure voucher” of, say, up to Rs 10 Lakh, which has to be used to buy some product or service before 31 March 2022, such that the “expense voucher” can be deducted from taxable income. This would incentivise everybody to go out and buy something, whether a house or holiday or car or high-end smartphone or desktop computer or whatever.
• An aggressive depreciation cover is provided for an industrial plant/equipment bought in the current year. For example, you could permit a three-year write-off for assets whose useful life is, say, 25 years. This would push capital formation on a very large scale.
• Finally, indirect taxes could be slashed by a hefty fraction – say, 33 percent or 50 percent – for a limited window, perhaps for six months or the whole financial year. This would be inspired by the stamp duty cut of 60 percent, authored by the Maharashtra government for a three-month window in 2020, which magically infused life into Mumbai’s comatose property market.

The above are exaggerated examples to create impact but the principle is clear.

We must create an unusual amount of purchasing power, an extraordinary capacity, for ordinary consumers via an unprecedented double barrel of lower taxes and prices. We should do this for a limited period so that buyers have to rush to encash temporary benefits.

Yes, the government’s tax revenues will fall, but don’t worry, that’s the best fiscal stimulus!