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Indian Economy: Is the stimulus coming or not?

Updated: Oct 19, 2020

By Amrita Madaan and Yashwinder Kaur


Statistics show that India’s economic growth derailed several quarters even before the pandemic ever occurred. The economy slid 24 percent in the quarter of April- June indicating that the process of recovery of the economy will not be an easy one.

The question arises that if this trend continues will the finance ministry be able to take relevant measures to proactively respond to such conditions where millions of people have been pushed into poverty and many have been rendered jobless?

In the recent interviews, Finance Minister Nirmal Sitharaman, has hinted that the government is considering introducing a new stimulus package in order to aid and speed up the process of the economic recovery. The government is considering a series of measures to boost the country’s economy including offering up to Rs. 3 Lakh crores in incentives spread over six years to create global supply chains in some sectors, tariff protections to key industries and further relaxation in foreign investment rules, and schemes aimed at the urban unemployed. The new fiscal stimulus package will focus more on the non – salaried middle class and small businessmen. However, the policy makers had decided not to borrow more and instead resolved to keeping the level of borrowing at the decided figure of Rs. 12 Lakh crores. As the situation unfolds, the government might find itself in a position to spend more in order to revive demand in the economy and generate orders for the impacted sectors.

Many have the opinion that the government should instead be focusing on how to preserve those things that would allow the economy to respond in distress times like lives, businesses and contracts. All of which can cost a lot of money and it is known that governments are the spenders of the last resort but even more important than the government’s ability to pay is its ability to absorb risk and provide liquidity. If more attention is paid on liquidity support and risk underwriting instead of spending across the board, then India’s debt might come under control instead of exploding.

Economists and commentators have mentioned that the government’s announcement on stimulus only tries to resolve the problem of the supply-side issues, there is nothing to bring in additional demand. It can be done by way of putting money in the hands of the people by either creating large infrastructural projects which in turn will create demand for manpower and goods alike or by putting money in the hands of the people without work. Academic economists are unanimous in their support for a second stimulus package during the upcoming festive season as they feel that it will be the right time to put out the fiscal stimulus and if it is done before the festive season then people are bound to spend, therefore stimulating the economy.

The economy gained momentum after the lockdown was lifted, though it was short lived as the pandemic continues. Railways, freight loading, e-way bills, highway toll collection, exports and power demands also give a clear indication of revival. In some sectors, a revival in demand is also visible while the Purchasing Managers’ Index (PMI) rose to an eight-and-half year high last month while the GST collections in September crossed last years and so the experts are urging the finance ministry to carry out the relevant measures to keep the momentum going. There is a broad consensus that the process of recovery is underway in the economy and therefore economic impulses need nurturing with a stimulus.

The center is yet to decide both, the amount as well as the timing of the second stimulus. Many feel that this decision should be taken immediately as procrastination would only lead to more complications.


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