Indian economy and stimulus package

What is the issue?

There is a declining trend in terms of investment and manufacturing, which calls for discussion on stimulus package.

What is a stimulus package?

• A stimulus package is a package of economic measures put together by the government to stimulate a struggling economy.
• The objective of a stimulus package is to reinvigorate the economy and prevent or reverse a recession by boosting employment and spending.
• Stimulus package argues that the impact of a recession can be lessened with increased government spending.

What are the challenges faced by Indian economy?

• Since the economy recovered from the Global Financial Crisis in 2011-12, there has been a weakness in manufacturing.
• There has been no fresh investments in the businesses for creating additional capacity.
• The inadequate demand cannot be revived by temporarily increasing public expenditure.
• Appreciating real exchange rate has weakened both the domestic market and the export market.
• This appreciation is driven by FII inflows and remittances, without any increase in productivity of the industry.

How these challenges can be tackled?

• Rupee could be depreciated to neutralise the real exchange rate appreciation.
• The government can intervene in specific sectors with multiplier effect, to create additional demand.
• Labour intensive sectors like construction, apparel, assembling etc. could boost the manufacturing sector.

Does Indian economy needs a stimulus package?

• At present, there is no external financial shock which calls for a rapid response like the 2008 crisis.
• The internal shock of demonetisation is over and the economy has been remonetised.
• Initial disruption due to implementation of GST needs to be mitigated and compliance problems addressed.
• There is no other factor which could be seen as a shock which calls for an immediate response in terms of a stimulus package.

Way forward

• Recent historical experience shows that comparative advantage is often created and nurtured by smart state action.
• The successful East Asian economies, starting with Japan, followed by South Korea, and more recently China have followed this model.
• India needs to attempt this and succeed in getting higher growth with jobs. 

Source: Business standard