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Fiscal Stimulus or Economic contraction



Recently, the prime minister of India Narendra Modi announced an injection of 20 lakh crore into the economy. The aim of the investment is to help India take a step forward towards economic stability. According to news, The PM claimed that it may take an extensive period of time to combat the outbreak of Covid-19, and hence it is salient for the economy to continue its economic growth to avoid a severe unprecedented economic crisis. Thus, the government decided to enhance economic activity by injecting money into the economy. Furthermore, the government of India also aspires to make India and reduce its economic dependency to avoid any vulnerability to the economy (in terms of relying on imports) during times of exogenous shocks.

The injection into the economy may be controversial, and may not bring out the expected outcome for the economy. There are numerous theories and ideas which indicate that such a fiscal stimulus can have negative effects on the India economy. Firstly, the heavy injection into the economy, 10% of the India GDP, would increase the government expenditure and would consequently result in a budget deficit. This will further hinder the aim of self-sufficient India because a budget deficit could further intensify the tax (Example: Liquor tax), consequently resulting in a cost push inflation, which could be indicated by the shift in the Phillips curve. Nonetheless, the cost push inflation can also erode the purchasing power of the people leading to a contraction in the business cycle. Subsequently, the unemployment in India would rise lowering the Human development Index value of India.

The enormous debt on India, world bank loan and fiscal stimulus, can deprecate the exchange rate of India and thus hinder international trade and transaction. The economy may also de-industrialize due to the fiscal stimulus. This is because as India suppliers are mainly allowed to supply essential commodities, the demand for primary commodities would rise and, hence according to the concepts of income elasticity of demand, the primary sector would expand resulting in de-industrialization. Lastly, the effect of the fiscal stimulus, as a multiplier effect, will not be obtained due to incoming inflation which would absorb the effects of multiplier effect, and thus the real GDP will not increase as forecasted.

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