8/7/2019 ECONOMIC REVIVAL PACKAGES - Panacea or Pandoras box

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ECONOMIC REVIVAL PACKAGES - Panacea or Pandoras box

Its 2010.The recession is probably bottoming out. The fervor with which pink slipswere handed out has calmed down, stock markets across the world have stabilized, hiring isback in favour as are bonuses, banks are a little less paranoid while lending, corporates aretaking tentative steps forward all in all normalcy is creeping back into

life.

This turn around can be attributed to the collective efforts of dispensations & centralbanks world over who have been diligently administering generous doses of what is calledfiscal stimulus, either in the form of tax cuts, change in key rates , direct infusion ofmoney into the market ,introduction of new spending measures by the government in theform of new projects etc.

While Indias stimulus package is valued at 12% of the GDP, Germanys is approximately 50 bn, Singapores is $20.5 bn & North Koreas is estimated at $40 bn. According to anestimate by the IMF the value of total fiscal stimulus given by economies worldwideamounted to US $ 2.18 tn or 3.5% of the world GDP as on March 09.

Thus, it is apparent that there is an implicit consensus among nations that it is the duty &responsibility of the government to jump to the economys rescue when the going is notgood. It may also be interpreted as an endorsement of the fact that stimulus packageswork.

But are they benign?

Due to monetary easing more money flows into households & corporates which spursdemand for everything that money can buy. But the supply remains more or lessunchanged. With too much money chasing too few purchaseables, inflation becomes aninevitable consequence. In fact, the high inflation nightmare that we the Indians are goingthrough these days is partly the effect of the stimulus measures .

While inflation is a relatively immediate consequence of economic revival packages, a farmore graver impact is registered by the way of slower economic growth in the long run.

According to a recent article published in the Economic Times ,the findings of a researchundertaken by Carmen Reinhart of Maryland University & Kenneth Rogoff of HarvardUniversity suggest that high government debt extracts a toll in terms of both lower growth& higher inflation. Since revival packages are always government sponsored , they add tothe governments debt burden whose ill-impacts have been documented by Reinhart &Rogoff. An important spin-off of a deteriorating debt /GDP ratio is downgrading of anations rating by rating agencies like Standard & Poor, Fitch etc that reduces theattractiveness of an economy to foreign investors.

Moreover the certainty that the government will step in every time the economy is indoldrums, instills a sort of recklessness & irresponsibility in the buying , saving & risktaking habits of individuals & corporates .Thus government dole-outs also pose a moralhazard.

8/7/2019 ECONOMIC REVIVAL PACKAGES - Panacea or Pandoras box

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Undoubtedly, economic revival packages do entail undesirable repercussions. But in their

absence the situation may turn even more dire. Once recession makes itself manifest ,

mistrust becomes rampant . Banks hesitate to lend, specially for commercial purposes

.Moreover due to increased risk perception of investors, cost of funds tends to go up. Under

such circumstances it becomes difficult to continue business. Closing down of a unit

translates into lay-offs & pink slips, which in turn reduces the purchasing power of

consumers, thereby making bottomlines the ultimate casualty. Thus, a vicious cycle is set-

off. In absence of artificial stimulus this cycle grows in terms of spread & magnitude ,

rendering the problem uncontrollable & endangering the economic future of the nation

thereby throwing open the real Pandoras box.

Steps like changes in key rates like CRR, SLR , lowering of interest rates prompt

businessmen to borrow & expand or at least continue at the existing pace, spendingmeasures by government compensate for loss of spending by private parties, launch of

government projects creates employment when the general trend is against hiring, tax

breaks increase the disposable income of consumers thereby making them spend more.

Thus it may be concluded that stimulants can effectively arrest the slump ,which is why

they are so popular & have even found the favour of economists. Not surprisingly the

debate often centers around the how much & when of fiscal stimulus & not the

whether of it.

The anticipated aftereffects of fiscal stimulus plans highlighted in the earlier part of this

article are as real as their promised benefits. Furthermore it may also be conceded that the

troubles that may surface in the long run are more compelling than the short to mid-term

gains that are supposed to flow from the stimulants. But one can think of tomorrow only

when today is secure.

OUR PARTING SHOT-stimulus packages may be opposed, written against ,questioned ,

wished away or at best curbed but can never be done away with.

SUBMITTED BY-Manisha Pattnaik

Shrabani NayakAyesha Pattnaik

MFC,Part 1