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So a lot of debate has been sparked about the timing & the scale of fiscal intervention(AD). Some say, govt should've intervened in April itself, while some believe it should intervene only after a vaccine is available. IMO there are no easy solutions here, it will always be a...
trade-off b/w time VS magnitude of intervention. Also a lot depends on the sector & consumer class which is going to be targeted. The earlier it intervenes fiscally, lesser will be the income hole to be plugged and lesser will be the number of B/S to be repaired. But remember it
can't do so unless it alleviates the supply side bottlenecks. So i would say there's a sweet spot some where in between wrt the trade-off. One more point worth mentioning is that fiscal intervention(AD) has to be precisely targeted and should be carried out in tranches/phases.
It should be gradual, so that it picks up the slack in the supply and at the same time pushes up the agg demand. Any sudden shock in terms of agg demand must be avoided. Thus it will ensure the sustainablilty and efficacy of fiscal intervention while ensuring inclusivr growth.
Covid unlike previous downturns is a twin blow, it has affected both supply and demand. Initially it was supply shock, but every supply shock amplifies and spreads to the demand side very quickly. So the first response should be towards providing relief to the supply side.
So in this way we can make sure that the capacity which will serve the agg demand remains intact. In this regard, i believe that a lot more could've been done to protect small firms and help them remain solvent. While a counter argument to this will be for how long can govt...
support businesses like tourism and other allied service industries? once a vaccine is available and post that, for any demand push this is the bare minimum which govt has to do. The clamour for letting some firms go bankrupt and let zombies be eliminated is good
argument for developed economies. For a country like India, we have to ensure every firm stays afloat, bcoz otherwise the agg demand(whether domestic or export demand) wouldn't be met. And any demand side stimulus(which is highly unlikely) requires capacity to remain intact.
To conclude, i am not expecting any large fiscal push(demand side) in the budget or post budget. At max, govt will be pushing more for infra spending through PSUs, off B/S and NREGA. So far the strategy of this govt, for last several years has been the same, i.e to support pvt
sector & pinning hope on a global recovery to aid export growth and overall GDP growth. All the fiscal intervention in this govt's tenure has been more towards the supply side. Hence, this notion that any additional fiscal deficit would lead to inflation is wrong. So even for..
export led growth, we need more fiscal supply side measures. Anyone expecting major tax cuts or large scale cash transfers are only going to get disappointed, bcoz nothing of this is going to happen. Infra spending will help both demand& supply side and therefore is the best...
approach. After all these years of so called fisc consolidation and tight inflation controls, i dont expect any outright demand push other than capex. Even if they do, the scale and magnitude of the intervention will be quite minimal.
