In the Economic and Political Weekly (EPW), the economist Arvind Subramanian describes the policy changes needed for India to be less affected by future global economic crises. With the caveat that, as the current crisis is not yet close to being over, full conclusions cannot be drawn, Subramanian provides a detailed illustration of the need for greater self-insurance, in the form of currency competitiveness, "moderate to serious mercantilism" i.e. building up current account surpluses, and in general, counter-cyclical measures such as dampening flows.
Yet Subramanian acknowledges that the aforementioned policies, while protecting India from financial contagion, would by make the economy more export-reliant make it more vulnerable to trade contagion, like China. Against this he proposes that we follow China's model of building up a strong sovereign balance sheet during the good times so that our debt-to-GDP ratio (58% in 2007 according to the World Factbook; probably somewhat higher today) comes down to the 30-40% range at worst. This is to enable the kind of fiscal stimulus that China has been able to deploy; India, on the other hand, has been forced to use monetary policy as the main means of stimulus because of our heavy indebtedness.
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Isn't fiscal stimulus in India a bad idea anyway?
ReplyDeletewith the amount of corruption we have, most of it will realistically never reach the Indian economy anyway.. I think the statistic is 5p for every 1 Rs..
We'll need a huge fiscal package to make any sort of change..
It depends on the kind of fiscal stimulus. Infrastructure projects are considered an excellent type of stimulus in developed countries because of their high multiplier effect. In India, of course, infrastructure is a huge need, but the high level of corruption means that you're right, and the stimulus would be ineffective.
ReplyDeleteTax cuts might be a better form of stimulus as politicians can't line their pockets.