The Indian government has introduced sweeping reforms in the fiscal and monetary policy of the country to boost the aggregate demand in the economy under the prevailing recessionary gap. The government has offered huge reliefs to consumers and businesses on the monetary side, encouraging investment and consumer spending. The layout of the 20-lakh crore stimulus package shows that the actual cash outgo of the government is Rs 3,20,902 crore (16 per cent of the total package), less than 1% of the GDP of India. The government is highly concerned about its international ratings about fiscal deficits and remains highly conservative about implementing an expansionary fiscal policy of a greater magnitude. India’s fiscal deficit for FY21 is pegged at 3.5% but most economists expect it to rise to 5% in wake of sharp fall in revenue in the current fiscal. It is estimated that the fiscal impact of ‘Atma Nirbhar’ economic stimulus package on the budget will be only Rs 1.5 lakh crore (0.75% of GDP). The government might impose higher excise taxes on demerit goods with a price inelastic demand, and also increase the import taxes and implement other protectionist measures to increase government revenue. The government might also cut specific allowances of employees to decrease the budget deficit and adopt austerity measures, decreasing government spending in the economy. Although the monetary measures and the liquidity injections would boost the aggregate demand, but the economy requires a ‘fiscal therapy’ or direct support from the government to boost the confidence and reduce the degree of uncertainty prevailing in the market. The fear of falling wages, rising unemployment, decreasing output, worsening economic conditions etc. might discourage firms from investing in potentisl areas. Several indutries are facing an acute liquidity crisis and the exlusion of various sufferers from the schemes is likely to lead to a widespread resentment among the producers. In a bid to bail the economy out of the crisis, the government should adopt a proactive approach by providing pertinent incentives to a majority of industries and generate employment in the situation of an ‘unemployment explosion’.
The liquidity measures taken to boost the demand and consumption of MSMEs and increase their spending in the economy would create a positive impact in the short-run, however the high degree of uncertainty might reduce the scale of investment and there is also a potential threat of high loan defaults and corrupt business practices. There is a huge need of a higher government spending in the stressed sector to instil the confidence in the economy. The impact of closures has resulted in business units to stop their operations, and they might need greater incentives to start businesses. Disallowing foreign tenders in government procurement orders would provide a protection against foreign companies and allow the local companies to achieve economies of scale and increase self-sufficiency. The institutional and legal instability, coupled with the complexities of doing business dissuades investors. Fiscal policies are accelerators of economic activities, while monetary policies are effective brakes to reduce economic growth when needed. Therefore, government should expand its fiscal spending, shift from austerity measures and succeed in instilling confidence in the economy.