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Friday, 29 September 2017

Do we need Fiscal Stimulus or just Stimuli

Fiscal stimulus is a more dreaded word than Hydrogen bomb these days at least on Dalal Street. The world is slowly moving out of easy money policy as evident from the recent central bank signals.  Bank of Canada has raised its rates and Bank of England may follow soon. European Central Bank has indicated that both the Euro and its economy are in better shape. Madame Yellen has made up her mind for gradual rate increases starting this December. So it’s too late for us to join this party, especially when even the hosts have left. Yeah Of course, Japan is still out there to give us company, in case we need it. But do we really need Fiscal Stimulus.

Even before government machinery could make up its mind, FPI money started exiting towards safe havens where interest rates are set to rise and economy seems to be in rosier condition. But this has been happening over the past few months as a stronger rupee has made arbitrage profits lower for many FPIs and thus the drain continued. Though domestic institutions have done their bit, what remains to be seen is whether their confidence in domestic economy will pass its litmus test in the coming quarters.

Our economy currently is going through the side effects of two major surgeries performed during a gap of just 6-7 months, I mean demonetization and GST. So definitely, some side-effects of such heavy dose of strong antibiotics will linger at least in the short term. Parallel cash economy will take some time to come into the legal net shoved by demonetization and throttled by GST. The small & medium enterprises which contribute about 38% of our GDP are still taking time to enroll in online GST up-gradation and thus a short term blip was expected.

Need of the hour is not to give heavy dose of steroids hurting the economy’s immune system in the long run but remove impediments present in the daily churning of the domestic economy. This can be either in the form of improving supply chains, simplifying GST further and prodding PSU companies to put their surplus to meaningful capex. For GST, I think what Jim Collins once said sums it all,

“Why on earth would you settle for creating something mediocre that does little more than make money, when you can create something outstanding that makes a lasting contribution as well?”