The fiscal stimulus programme will need to be bold and large, in the range of 10-15% of GDP, much like in China, Japan and the US. To minimise the downside risks associated with this, it should be made an integral part of a structural reform programme
By Ejaz Ghani
Central banks can only provide money. They cannot spend it. Given the huge collapse in private spending, India can launch a fiscal stimulus programme to reverse the economic decline and job losses due to the lockdown associated with the coronavirus. The fiscal stimulus programme will need to be bold and large, in the range of 10-15% of GDP, much like in China, Japan and the US. A fiscal stimulus is not necessarily associated with rising inflationary trends, or macroeconomic stability, or loss in growth or jobs.
To minimise the downside risks associated with fiscal stimulus, it should be launched as an integral part of a comprehensive structural reform programme aimed at reviving economic growth and increasing the pace of job creation. How will this be achieved? Fiscal stimulus will need to focus more on increasing investments in physical and human infrastructure, promoting entrepreneurship, and achieving gender equality and green growth.
Infrastructure and growth
A fiscal stimulus programme during a crisis often tends to crowd out capital investments in infrastructure to shift resources for immediate welfare programmes. While relief programmes are a short-term solution, economic growth remains the best solution for poverty alleviation. India’s biggest constraint to poverty alleviation remains poor infrastructure and slow economic growth. Empirical evidence from 500 districts in India has shown that scaling up investment in physical and human infrastructure has been the biggest driver of economic growth, job creation and poverty reduction. Much like in China, infrastructure investment is a key driver of growth, and it plays a bigger role compared to other drivers of growth like Doing Business indicators.
India’s infrastructure financing gap is huge, at over $1 billion a day. It is growing exponentially. A fiscal stimulus could close this financing gap immediately. Shifting the responsibility to commercial banks as the source of debt funds to finance infrastructure projects has not worked in the past. Banks often tend to lack the experience in project financing, and infrastructure financing crowds out financing available to private entrepreneurs. Bank financing of infrastructure also creates asset-liability mismatches, given that banks attract short-term deposit and infrastructure projects need long-term investments.
India has many success stories with infrastructure projects. The Golden Quadrilateral highway project implemented by Atal Bihari Vajpayee is the biggest success story that unleashed India’s growth story. The next frontier for infrastructure investments through fiscal stimulus will be in rural areas, where 60% of the population lives. Rural areas also have bigger growth potential compared to urban areas, given that the manufacturing sector is moving out of costly and congested megacities to secondary cities and rural areas. However, unlike in China, India’s manufacturing sector has been constrained by poor infrastructure in rural areas that need more investments, from roads to broadband communication.
A fiscal stimulus needs to be well-coordinated. While the Ministry of Finance takes the lead, it can help coordinate with the line ministries and state governments to strengthen the institutional and legal framework for infrastructure projects. Problems of moral hazard and adverse selection can be resolved by reducing the opaque structures of projects, providing the information required to improve their risk-return profiles, and establishing project and sector-specific institutional frameworks with independent regulators.
Goods and services cannot be produced and delivered without roads, electricity and telecommunication. And moving people is as important, if not more important, as moving goods. Investing more in roads, railways, bridges and schools should be an integral part of fiscal stimulus agenda. If this is important in the current US context, the role of infrastructure is even more fundamental in India, where there’s much more to be done than in the US and other advanced economies.
Entrepreneurship and job creation
Hundreds of millions have lost their jobs during the coronavirus crisis. India needs to create 10 million jobs every year to employ new people who join the labour force every year. Evidence from 500 districts in India has shown that there is a strong link between entrepreneurship and job growth. It is a worrying trend that there are too few entrepreneurs in India for its stage of development.
The link between entrepreneurship and job growth is not automatic. Cities and states that have invested in physical infrastructure and education have produced many more entrepreneurs. There are several policy levers that can be used in a fiscal stimulus programme to promote India’s entrepreneurial growth. Instead of being preoccupied with chasing large firms from other locations, policymakers need to shift their focus to improving entrepreneurship in their states.
There are well-understood limits to the pace with which countries can accumulate physical capital, but the limitations on the speed with which the gap in knowledge can be closed are less clear. Because of the strong link between education and entrepreneurship, policymakers should remove any constraints that restrict the growth in the quality and quantity of local colleges and educational institutions. The entrepreneurial potential of India is very large. Imagine if India had more entrepreneurs: given the link between entry, young establishments and job growth, how fast would its growth and job creation then be?
Gender and growth
An economic downturn adversely impacts women more than men. India’s rating in gender balance in economic participation and entrepreneurship is already amongst the lowest in the world. The coronavirus downturn has worsened it further. India’s fiscal stimulus will need to focus on improving women’s access to education and infrastructure. Due to the nature of household responsibilities, inadequate infrastructure particularly affects women. The lack of specific transport infrastructure and paved roads within villages is a big bottleneck for women, given the constraints in geographic mobility imposed by safety and social norms. Investment in local transport infrastructure will directly alleviate a major constraint for women to access markets.
Women will play a bigger role in India’s future economic growth, if supported by the fiscal stimulus programme. This support can come in many forms: giving priority to women-owned enterprises in state procurement of goods and services, promoting female labour force participation in public sector jobs, reducing discrimination and wage differentials, and promoting women into leadership and managerial roles. Indeed, empowering half of the potential workforce will have significant economic benefits that go beyond promoting just gender equality.
A key challenge for policymakers is how to prevent jumping from ‘coronavirus frying pan into the climate fire’. The impact of climate change is being felt by everybody in India. More than 70% of India’s population is exposed to outdoor air pollution, which has contributed to one in eight deaths and has reduced the average life expectancy of Indians by nearly two years. Extreme weather conditions, air pollution, crop failure, biodiversity losses and much more are affecting both human health and natural wealth.
It is estimated that nearly 70% of green growth could be achieved by improving energy efficiency. India has a mixed record on energy efficiency and green growth. Empirical evidence from 500 districts in India shows rising spatial disparities in energy efficiency. It is a worrying trend. More developed states have improved energy efficiency. But it has worsened in lagging states. Energy efficiency is much lower in rural regions compared to urban regions. A fiscal stimulus could play a key role in promoting green growth by investing more in rural areas and lagging states to halt the rising spatial disparities in green growth within India.
India has the potential to achieve double-digit growth, thanks to globalisation, the rise of the middle class and demographic dividend. But growth is not automatic. Globalisation does not automatically engender growth. It needs infrastructure—ports, roads, communication, education—to take advantage of trade. The link between demography and growth is not automatic. A demographic dividend could morph into a demographic disaster if people don’t have jobs. India is well positioned to benefit from a bold fiscal stimulus programme.
The author taught economics at Delhi and Oxford universities, and worked for the World Bank. Views are personal