Too little, too late

The third stimulus package of the government is too little, too late. It does little more than reduce excise duty and service tax by 2 per cent each. The government needs to show far greater courage if it wishes to impact the economy. For example, movement on distortionary taxes, surcharge and innumerable cesses on the fiscal front and a sharp reduction in policy interest rates and the cash reserve ratio on the monetary front could have provided a more effective stimulus package. This, however, could have been expected if there had been robust coordination on monetary and fiscal policies for pushing growth. Given India's long-term strong growth fundamentals, the importance of keeping sentiment high and investment up should be obvious.

While the present package can do little to push up the fast slipping growth rates, it will push up the fiscal deficit further. The government did not buy fiscal space by cutting deficits when the going was good; today when it is in a situation when the economy needs a large stimulus it finds itself in a position with little fiscal space. The interim budget's estimated fiscal deficit of 5.5 per cent of GDP for 2009-10 was already an underestimate based on 11 per cent nominal GDP growth. Now even those actual numbers for revenue collection in rupee terms will have to be revised downwards. The Standard & Poor's downgrade was on the cards once the budget numbers had been announced. This package would make the deficit wider but not improve GDP growth, an equally important element of India's rating.

While finance ministers and central bank governors across the world are working overtime to save their economies from a world downturn, the Indian establishment is behaving as if it is almost business as usual. With no full-time finance minister and a central bank governor who appears to lack the courage to take any step for fear of those at the RBI who warn that there may be some inflation lurking in these deflationary times, one wonders who will take the lead in actually moving forward. If those in leadership become followers, followers of data which comes out with long lags, of public opinion which takes time to get heard, it would not be surprising if the

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