Stimulus Should be Withdrawn
--> Posted on 2010-02-26 13:38:03 ByI think there is no use of fiscal stimulus. Till date 2 stimulus totaling to about Rs 3 lakh crore have been inducted into the economy but there has not been a substantial improvement in the state of affairs. It somehow doesn’t seem to solve the purpose, and instead has helped increased the fiscal deficit of the country which no has almost reached to double digit figures of about 10 % of GDP( including borrowings, tax and other subsidies). How long are we going to allow the government to "throw good money after bad" with our tax money?
The shortfalls of the earlier stimulus are many but major ones have been cited below:
It has lead the country into a Liquidity trap. Banks were willing to lend only to the most credit-worthy potential borrowers, but such borrowers were unwilling to borrow because of the prevailing uncertainties and the expectation of a slowdown. Meanwhile, all other enterprises, even those that desperately required working capital to stay afloat, found it increasingly difficult to access bank credit even as they face more stringent demand conditions.
The promised fiscal expansion was small, only up to Rs.20,000 crore of direct additional spending through the Planning Commission in unspecified areas. This was less than 4 per cent of the government’s projected expenditure for the year, and only around 0.5 per cent of gross domestic product (GDP).
The aim of reviving infrastructure investment was addressed by promising to allow the public sector India Infrastructure Finance Company to float Rs.10,000 crore worth of tax-free bonds and leverage the money to borrow further in order to provide finance to those private participants in the public private partnership (PPP) projects who have developed cold feet.
According to Pronab Sen, economist and chief statistician of India, there has to be a greater emphasis on interventions to remove the bottlenecks in the system. Sen also questioned the move to withdraw ceilings on the rates for external borrowings. It brought in riskier capital into the economy without the certainty that it solves anything,” he said.
Restructuring loans in hard times is normal commercial practice. But there is a thin line dividing. Restructuring based on the commercial judgment of banks and restructuring driven by political interference. The latter puts the health of the banking sector on the line. And as the on-going crisis has shown, governments that mess around with the health of their banking sector do so at their peril.
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