A fiscal stimulus is seen as an efficient tool for reviving economies from slowdowns; however it alone cannot handle cyclical and structural issues. Discuss in context of India.
The fiscal stimulus (based on Keynesian economics) has been the norm throughout the world to pull countries out of cyclical slowdown.
Fiscal stimulus comprises:
- Tax cuts
- Fiscal benefits
- Easy loans
- Incentives to consume
- Support to demand
- Incentive to invest
Role of fiscal stimulus in reviving economies:
- India’s growth trajectory went downwards during Covid-19 Pandemic, and fiscal stimulus was given to revive it.
- Focus on stimulus will push the private sector to invest and people to consume.
- Fiscal stimulus might push the inflation up and motivate corporate sector to supply.
- Stagnancy in economy due to people having less disposable income can be solved through tax incentives and focused interventions.
- The Virtuous cycle of growth can be pushed up through spending on potentially labour intensive sectors so that money reaches to the poor and lower middle class, since they have tendency to spend more and immediately.
- Schemes like MGNREGA and infrastructural development need to be incentivized to create assets and increase employment.
However, structural issues would not be handled through fiscal stimulus.
Structural slowdown and problems needs to be elevated through:
- Reforms on labour, regulations, etc.
- Focus on re-skilling and up-skilling.
- Creation of diverse sectors.
- Tapping Global Value Chain and its demand.
Fiscal stimulus is not a Panacea to the slowdown, brought by a mix of cyclical and structural issues. Government needs proactive policy interventions with proper feedback from ground to pull Indian economy out of slowdown and avoid recession.
Topics: GS-III: Indian Economy Issues Relating to Planning • GS-III: Economic Growth Development