The second Indian stimulus package will fail to revive the economy. The government has eased credit in the infrastructure sector and consumer market, provided some duty reliefs and tried to relieve the pains of the realty sector by allowing them ECBs. This will no doubt increase liquidity in the market and provide a short term relief to certain sectors but it will not lead to broad based recovery of the indian consumption. The government should realise that consumers only spend when they have a confidence that they will keep on earning and will be able to pay their debts in short as well as long term.
The direction of package is wrong especially because the pain point in Indian crisis has not been lack of money to spend, but, the willingness to spend. The electronic media has amplified the fears of slow down to such a level that people are just cutting down on spending fearing a job loss. It is leading to a spiral effect where consumption has gone down forcing manufacturers to cut back expenditures and eventually jobs. Thus, the problem will not be solved by giving people more money to spend or make the stuff cheaper as there will always be a doubt that it might suddenly run out as it was introduced. The problem will be solved by making broad based reforms to boost confidence in the Indian story, governance and economy.
The Indian government should have sensed the mood of the nation and tried to prop up the confidence by offering package that would have appealed to the heart and the head. The government could have created a special vehicle to focus on improving the infrastructure in the country and in devising processes to increase access to the new infrastructure. Spending on building infrastructure would have not only created new jobs, but also sent a signal that the government is interested in growth and they are going to take advantage of the slowdown to build infrastructure to fuel long term growth. This signal would have reinforced confidence in the Indian story and investors would stay put in the country, thus, providing a much needed psychological cushion to the consumer market.
Secondly, the government should have spent substantially on recruitment and modernisation of security personnel and revamping of judiciary . The recent mumbai attacks would have allowed the government to take such a step and restore the confidence in governance. Another step that the government could have taken would have been to launch e-governance in the country. E-governance should have been introduced at every level the citizen interacts with government institutions. This would have sent the signal that the government is trying to reduce corruption and give a power to the citizens to make the bureaucrats accountable.
Thirdly, the Indian government should have taken the opportunity to start investing in clean energy sources. With all the world attention on climate change and the commitment of US administration to spend on clean energy the government should have started a mechanism to allow the Indian industry cash in on the emerging next bubble. China has taken a lead in the manufacturing sector already. The government could have earned a lot of money by creating carbon credits and trading them for a profit. Inspite of it, there is a huge market in India itself, which if we dont capture, will be served by others.
I really feel that the government is far away from the concerns and the need of the time and the people. If something could be done…
