Will it be appropriate for the government to roll back the stimulus packages in the Budget?

As the world economy is still in the recovery mode, there is hardly any reason to wind up stimulus now

Pressing the exit button on fiscal stimulus announced against the background of the global credit crisis that erupted in September 2008 may not be the correct approach. India has to take a measured approach on this score, closely monitoring the recovery of the world economy. As the global economy still struggles to shake off the effects of the worst credit crunch in several decades, withdrawing the stimulus package at one go would be damaging to the long-term prospects of the Indian economy.

In spite of the financial crisis, the country was able to clock a healthy growth rate. Achieving the growth rate of 6.7% in fiscal 2009 was largely due to the large stimulus packages doled out to prop up the flagging consumer and manufacturing demand.

Notwithstanding the robust 7.9% growth recorded in the second quarter, the Planning Commission pitched for continuation of the stimuli provided to the industry till the end of March 2010.There is hardly any justification at present to reverse the policy in the Budget.

The International Labour Organisation has indicated that premature exit from fiscal stimulus measures would result in a surge in the unemployment rate, rendering the economic recovery fragile. More than 40 million people could drop out of the labour market.

Unless the full recovery is on the horizon and planners agree that it is time to withdraw stimulus packages, no hasty exit policy must be adopted. Hence, a balance must be struck between the key budgetary imperatives and capacity of the economy to bear the current level of fiscal deficit.

Thus, we have a simple answer to why the government must not roll back stimulus packages in the forthcoming Budget?that it will hamper chances of economic recovery.

The writer is IMBA-IB (integrated) student of Amity International Business School, Noida. Email: gargmanvi89@gmail.com

The government should remove sops given to various sectors in a phased manner

Punit Rupareliya

Withdrawal of the stimulus packages will impact industrial growth that has positively responded to these fiscal incentives. The pattern of growth seen in the sub-sectors of the industry testifies this fact. And a sudden withdrawal of stimulus that will surely break this growth spell should be avoided. The index of industrial production for November zoomed 11.7%, compared with the corresponding month in 2008. So, we have a good report card, nearly a year after rolling in stimuli.

The sops were mainly aimed to generate more demand for industrial goods. With the economy recording 7.9% growth in the second quarter (July-October), it is expected that the Union government may start withdrawing some of these sops, especially with a view to contain the rising fiscal deficit that is expected to go up to 6.8% of the GDP by the end of the current fiscal. Even if the government attempts to remove stimuli from the scene, it should do it in a phased manner. A headlong rush to withdraw them at one go would do more harm than good to the economy.

To begin with, the government should try to withdraw sops given to the industrial sector. We have to keep in mind that recovery is taking place in India faster than in other major economies of the world, except China. But the size of the stimulus China undertook dwarfs India?s. In the agricultural sector, there is a need for the government to devise liberal policies so that the common man would get some badly-needed relief from the rising food inflation. Food inflation threatens to blunt people?s purchasing power, putting growth prospects under a cloud.

The writer is BCom student of RP Bhalodia College, Rajkot. Email: punit.rupareliya@gmail.com

It will be too early to withdraw the measures, given that India?s export-oriented sectors are under pressure due to the slump in global demand

Mahendra Rathi

To overcome the financial crisis, governments in major countries had injected monetary stimulus into their economies. Starting from December 2008, India had implemented some packages in this regard. Excise duty was slashed from 14% to 8% in two phases ,service tax was reduced from 12% to 10% and plan expenditure was stepped up to bolster various sectors of Indian industry.

As a result, the country?s fiscal deficit widened to rather unsustainable levels, though fiscal stimuli yielded dividends, producing 7.9% growth in the second quarter of the current fiscal. India?s factory production in November expanded by 11.7%, the fastest in 25 months.

Yet, the Centre should be cautious in withdrawing stimulus measures in a hurry. In fact, the government should do so only after ensuring that the growth trajectory is in a stable mode. As Union minister for commerce & industry Anand Sharma noted recently:?We feel that we have to be cautious with our approach (on the withdrawal of stimuli). This will be done only after we ensure that there is sustainable growth.?

It?s true that some sectors have recovered well, but there is still pressure on export-oriented sectors, as they continue to bleed in the aftermath of a slump in demand in the recession-hit West. Another reason for continuing with stimuli is that though India?s economic growth is much stronger than expected, the credit offtake had been lacklustre. Banks needs to lend more so that more investment takes place. The right time to roll back would be in fiscal 2010-11, as IMF and World Bank predict a brightening of the global economic scenario by then. Even so, the case for maintaining stimuli would lose force if the budget deficit threatens macroeconomic stability.

The writer is PGDM student of Bimtech, Noida. Email: mahendra.rathi11@bimtech.ac.in