November 18, 2019 / 10:25 AM / a month ago

Fiscal stimulus needed to revive India's stuttering economy: analysts

MUMBAI (Reuters) - India has depended on monetary policy to support its economy growing at its slowest pace in six years but the government must now deploy more direct fiscal stimulus or risk a long period of stagnation, analysts and experts say.

FILE PHOTO: A general view of Mumbai's central financial district, India June 13, 2017. REUTERS/Danish Siddiqui/File Photo

Growth in Asia’s third-largest economy has been hit by weak consumer demand and slower government spending amid pressures from the Sino-U.S. trade war, and more recent economic data suggests growth could fall further.

The central bank has already chopped 135 basis points off its key lending rate, but this has failed to spur demand.

In an opinion piece in The Hindu newspaper on Monday, former Prime Minister Manmohan Singh - the architect of the liberalization of India’s economy - wrote the government needs to “act quickly to restore consumption demand through fiscal policy measures since the impact of monetary policy seems muted.”

He warned the economy risks stagflation - high inflation combined with stagnant demand and high unemployment - if it fails to act.

Other economists agree. “It’s not a question of debate, it has now become imperative,” said Rupa Rege Nitsure, chief economist at L&T Financial. “We need to keep aside all other considerations and work in the interest of growth.”

While the government has announced various sector-specific measures and a cut in corporate taxes, economists note it has not directly addressed the widespread weakness in consumption demand - the main economic driver in recent years.

Economists and analysts say it is time to loosen the purse strings and let the fiscal deficit climb above the targeted 3.3% until the economy is back on its feet.

Subsequently, calls are growing for direct cash transfers to the rural economy and even cuts in income taxes to boost demand.

Large fiscal stimulus has in the past lead to a spike in inflationary pressures, but economists say consumer price inflation has stayed within the central bank’s mandated 2%-6% range.

Annual retail inflation rose to 4.62% last month, breaching RBI’s medium term target of 4% for the first time in 15 months but core inflation fell sharply suggesting the rise is likely a blip and not broad-based.

“If someone is suffering from cancer and doctors concentrate on controlling his sugar or other ailments, that’s wrong. They have to administer chemotherapy despite the fact it has many side effects,” Nitsure said. “We can control the side effects, but first we must eradicate the infection from the system.”

Editing by Euan Rocha and Jacqueline Wong

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