Description
It discusses the good and bad of the stimuli.
1 |Page
How Much Is Too Much: Stimulus Package For Global Recovery
madhav_kumar@yahoo .com
2 |Page
Abstract
The world has been in a major financial downturn for over more than a year. It has been a time of a lot of grim news appearing on a daily basis about the poor condition of affairs globally and the depth of an imminent recession. The situation demanded drastic measures and a coordinated global effort to overcome the prevailing circumstances. Most of the major economies, 30 of them, instituted financial restructuring plans and implemented various measures to stimulate the system and put the globe back on the growth trajectory. The stimulus packages have far reaching implications for the countries concerned and for the world as a whole. The present status of global economy is showing early signs of recovery and it is expected that a stable condition would be reached in the next one year. This has raised questions as to whether there is a need for a continued economic stimulus or such measures can be withdrawn now to let the market take charge of the economic scenario. Whether the stimulus ,which drains out taxpayers money needs to be sustained or is the time ripe for an exit strategy is the most important question that needs to be answered in the near future.
3 |Page
Table of Contents
Table of Contents....................................................................................................... 3
4 |Page
Introduction
The year 2008 was one of the most turbulent ever as far as the world economy is concerned. Major corporate behemoths and financial powerhouses, the veritable symbols of modern capitalism, fell down like a pack of cards. In a flat world none of the economies were isolated from the fallouts of this crisis. The world saw one of the toughest times in the form of a global financial crisis and an economic slowdown. With the US and UK economies contracting by 0.6 and 0.5% respectively in the last quarter of the year 2008, the major developed economies of the world were facing major slowdown or recession. Financial crises are not a new phenomenon. The general view is that these crises are a function of mismanaged and malfunctioning markets and hence can be rectified by sensible policy actions like greater regulation, transparency and accountability. A less popular but quite valid school of thought goes ahead to say that financial crises are inevitable and endogenous to the functioning of a normal capitalist economy which allows free rein to the actions of private agents. So a financial crisis can be resolved by policy actions is a well accepted fact. The crisis of this size and complexity was never seen before. A recovery surely required concerted efforts of not only the developed countries but also of the important economies of the new order like India & China. Thus soon after US declared its bailout and stimulus packages most of the world followed suit with all major countries declaring financial packages The total amount declared was of the tune of about 3 trillion dollars. This paper tries to understand the various measures taken by economies across the globe and elaborates on whether such policies need to be continued further or the world economy should now be set to start moving on its own. This question has gained a major importance in the last few weeks as most economies are seeing signs of recovery and are contemplating on whether further action needs to be taken to support the economy.
Fiscal Stimulus : Does it really work and how?
5 |Page
Fiscal stimulus involves a combination of lower tax cuts and higher spending. In theory the tax cuts will increase disposable income and therefore encourage consumer spending, leading to higher aggregate demand and economic growth. Diagram of Increased AD
For example, If the UK government cuts VAT by 2.5%. This means that people will pay £12.4 billion less VAT. That is a pretty substantial tax cuts. But will it increase spending considering the following facts • • • • People might want to save the extra disposable income Falling house prices might outweigh the tax cuts. It takes time for people to respond. Credit crunch is causing sharp fall in lending and normal business activity.
Therefore, consumer spending may continue to fall. However, on the other hand if the UK government implements policies such that the tax cuts are being met with lower interest rates and a depreciating domestic currency, both of these should help increase aggregate demand. So we can say that fiscal policy can help to reduce the extent of a recession. It may not solve the recession straightaway and it may take time, but, it may mean the recession is shorter lived and not as steep. Also, if the inflationary pressures are falling away, the inflation impact of expansionary fiscal policy is not so bad making it advantageous as a measure to ensure speedy recovery.
6 |Page
The Bailout: Stimulus Packages Across The Globe In this paper we will understand in detail the stimulus packages of two countries i.e. USA and India. Soon after the crisis surfaced in its entirety the US government came up with proposed stimulus packages of $825 billion. The declared package was so big that, it could be the gross domestic product of the 19th largest country, just ahead of Australia. The stimulus was wide ranged from money for infrastructure and tax cuts to schools and health-care technology. Let us see the key components’ of this stimulus package: • $550 billion in new spending • $275 billion in tax relief ($1,000 tax cut for families, $500 tax cut for individuals through SS payroll deductions) • $ 90 billion for infrastructure • $ 87 billion Medicaid aid to states • $ 79 billion school districts/public colleges to prevent cutbacks • $ 54 billion to encourage energy production from renewable sources • $ 41 billion for additional school funding • $ 24 billion for "health information technology to prevent medical mistakes, provide better care to patients and introduce cost-saving efficiencies" and "to provide for preventative care and to evaluate the most effective healthcare treatments." • $ 16 billion for science/technology ($10 billion for science facilities, research, and instrumentation; $6 billion to expand broadband to rural areas) • $ 15 billion to increase Pell grants by $500 • $ 6 billion for the "higher education modernization." As can be well understood from the breakup as shown above that the stimulus package as announced by the government of US was very comprehensive. It tried to cover every aspect of the economy and create long term value for the economy and society as a whole.
7 |Page
After Mr. Barrack Obama took over the charge as the president The American Recovery and Reinvestment Act 2009 (ARRA) was passed on 17th February 2009. The measures are nominally worth $787 billion. The Act includes federal tax cuts, expansion of unemployment benefits and other social welfare provisions, and domestic spending in education, health care, and infrastructure, including the energy sector. The Act also includes numerous non-economic recovery related items that were either part of longer-term plans or desired by Congress (e.g. a limitation on executive compensation in federally aided banks). Provisions Of The ARRA Act 2009
To counter the economic downturn and give a boost to the economy, Indian government also announced and implemented comprehensive stimulus plans. The first stimulus package was announced on 06th December 08 by the central banker, RBI. Following are the key features of the first stimulus package: • • Repo rate cut by 100 basis points to 6.5 percent Reverse repo rate cut by 100 basis points to 5 percent
8 |Page
• • • • •
No changes in cash reserve ratio and statutory liquidity ratio Refinance of Rs.7,000 crore (Rs.70 billion/$1.4 billion) for Small Industries Development Bank of India Refinance of Rs.4,000 crore (Rs.40 billion/$800 million) for National Housing Bank Housing loans under Rs.2 million classified under priority sector Exceptional treatment to commercial real estate exposures Restructuring by banks eligible for exceptional regulatory treatment
These measures were basically to step up demand and arrest the growth moderation .Net liquidity since September 2008 was enhanced by Rs.300,000 crore ($60 billion). At this juncture it was also expected that the recession will be deeper and recovery longer than earlier anticipated. As the confidence in global credit markets continued to be low the credit lines remained clogged India's exports declined in October 2008 for first time in seven years. The demand for bank credit was slackening, despite comfortable liquidity. But inflation, was declining and economy virtually was on the verge of a “deflation”. The second leg of stimulus was announced by the Government of India on 2nd January 2009. This package was to assist the measures taken in the first one with a long term development focus. The highlights of this stimulus package are as follows: • Additional plan expenditure up to Rs. 20,000 cr. in the current year mainly for critical rural, infrastructure and social security schemes such as Pradhan Mantri Gram Sadak Yojana , Jawaharlal Nehru National Urban Renewal Mission etc. • • • • Across-the-board cut of 4% in ad-valorem Cenvat rate except for petroleum products Several other measures to support exports, housing, Micro, Small & Medium Enterprises and textile sectors Authorizing IIFCL to raise Rs. 10,000 cr. to refinance bank lending for infrastructure projects Liberalizing the policy on External Commercial Borrowing (ECB)
9 |Page
• •
In order to give a boost to the corporate bond market, FII investment limit in rupee denominated corporate bonds in India would be increased from US $ 6 bn to US $ 15 bn States will be allowed to raise in the current financial year additional market borrowings of 0.5% of their Gross State Domestic Product (GSDP), amounting to about Rs 30,000 crore, for capital expenditures.
The measures outlined above taken together with steps taken earlier constituted a substantial counter-cyclical stimulus in the current year. The Government was well aware that the measures required to provide an economic stimulus to the economy had to extend beyond the financial year 08- 09. In February 2009 Finance minister Pranab Mukherjee announced the third leg of stimulus package. The package cut excise duty and service tax two percentage points each. Service tax has been cut across the board from 12 per cent to 10 per cent and the excise has been reduced by the same margin only for items that currently attract the 10 per cent rate. Most other major economies took drastic measures to reduce the effects of the downturn. A comparison of the measures taken by the countries has been given in the Appendix 1. Almost all major countries have depended on increased governmental expenditure to provide a thrust to the falling GDP’s and economic health.
Analysis Of The Effects Of Stimulus:
The financial crisis and recession have been a disaster for the US and its labor market. The economy has lost more than 7 million jobs since the recession began. The revival of the labor market is expected to be central to economic recovery. As shown in the diagram below the
10 | P a g e
situation of employment does not reflect an early recovery and as far as the US job market is concerned the figures are much worse than was expected after the stimulus package. However the actual effects would still need some more time to surface and only then it would be clear whether the stimulus was able to address the problems of unemployment.
The U.S. trade deficit narrowed in August as exports posted a small gain, while imports fell on a big drop in demand for foreign oil. The continued rise in exports may be viewed as an encouraging sign that the global economy is starting to recover from a severe recession. But the deficit is expected to rise in coming months on the back of a rebounding U.S. economy, which will start importing more foreign products. But that impact will be dampened somewhat by rising exports as American manufacturers benefit from a revival in the global economy. The result of the latest Wall Street Journal survey with 48 economists speculates that US economy will witness 3.1 % growth in Gross Domestic Product starting from the third quarter of this year. The economists also predict that chances are less that unemployment will be below 6% from the current 9.8%. So the example of US suggests that though the package has somewhat improved the condition and has provided stability to an economy in tatters the time is still not ripe to let the market take control.
11 | P a g e
As far as the Indian economy is concerned it has seen steady expansion in domestic demand while savings and investment rates have picked up. The series of fiscal and monetary steps have helped revive demand. Early signs of revival of the Indian economy are visible though failed monsoons have cast a shadow on agricultural growth. The economy is expected to grow by about 6.5-6.7 % despite the poor monsoons. The figures of industrial index of production released in September for July showed 6.8 per cent growth in factory output. Reflections of an economic revival can also be seen in the current capital market rally. But these preliminary indications do not completely reflect a revival and there is need to be very cautious in every measure taken, as an adverse policy can result in a deeper slump.Indian policy makers need to keep borrowing costs low to aid a nascent economic recovery even as inflation quickens. A dear money policy or credit curbs at this juncture will have an adverse impact on growth So though the stimulus packages have resulted in the economy being virtually back on the growth track, there is still some time before we can expect the withdrawal of stimulus and allowing the market forces to takeover.
Is It All Good : The Adverse Effects of Stimulus
There is growing concerns across the world regarding the adverse effects of a stimulus package. Let us take a look at some of these major issues: • The stimulus measures have resulted in increased national debts. In case of the USA the national debt stands at 11.4 trillion dollars which and is about $ 37,000 per person. Continuing with the stimulus would further increase the debt levels.
12 | P a g e
•
In case of India the fiscal deficit is at a very high level (6.8% Of GDP). Such a high deficit is a major cause of concern and requires an effective stand on when to stop the stimulus
•
One major concern with these huge bailouts is the creation of a “Moral Hazard” scenario. These may affect the companies in terms of poor management, weak leadership by setting up bad precedents for future.
•
Another major concern about the stimulus packages has been the use of taxpayers’ money to revive a problem that has been created by a few, largely greedy and irresponsible firms. This has frequently been quoted as “Privatization of Profits and Nationalization of Losses”.
The Long Term Implications: Though the stimulus package has been majorly for the revival from the economic stagnation and recession, it has also real long term implication for the economies. An important part of all stimulus packages has been in the form of infrastructure spending to accelerate growth. This improved infrastructure is expected to create value much beyond the scope of the package. This is also going to boost foreign investments in the long run in countries like India which are in desperate need of high quality infrastructure. Also the increased spending is expected to create a large number of jobs. This will benefit a large section of unemployed and would boost the consumption demand and disposable income in the long run.
Conclusions: The present signs of revival in the global economy should not be confused with the financial crisis being over and the countries should be ready with policies to sustain the recovery, The countries around the world need to co-ordinate policies to achieve a global rebalancing and sustain the recovery. This view assumes even more significance in the event of G-20 nations
13 | P a g e
agreeing not to withdraw stimulus packages prematurely and coordinate actions among themselves in this regard. The global activity is now on the rise again, however, the world economic growth is expected to be in the negative zone of 1.1 percent in 2009 as per IMF estimates. Growth of global economy is expected to be around 3% by next year as per the estimates. After a deep recession, global economic growth has turned positive, driven by wideranging, co-ordinated public intervention that has supported demand and reduced uncertainty. However, the recovery is expected to be slow, as financial systems remain impaired and support from public policies will gradually have to be withdrawn. But as of the next year or so the stimulus needs to be continued to ensure that these green shoots are actually converted into trees that can weather tough conditions and stand on their own.
Appendix 1 Global Stimulus Measures Country
Japan France Germany (1st) Germany (2nd) Britain
$(USB) %GDP Features
516.3 33 29 67 30 11.70% 1.30% 0.80% 1.80% 1.10% First package total = $278.3 billion, Second package total = $238 billion; $111 billion for tax cuts, More than half of total for capital injections for lenders and financial institutions infrastructure; loans to carmakers infrastructure; tax relief & support for SMEs; education; aid to auto industry; tax relief for households 2.5% cut in VAT; govt. guarantees for loans to SMEs
14 | P a g e
EU-wide
254.6
1.50%
"judicious tax cuts"; public works projects; reductions in interest tax cuts for corporations, subsidizing wages, guaranteed bank loans (gov't to assume 80% risk on private loans), infrastructure spending, cash handouts to low earners, and a 20% personal income rebate of up to $2,000 per worker. Massive investments in infrastructure, tax relief and transfers, and other new initiatives infrustructure 263.7 billion social welfareprojects 41 billion disaster reconstruction 146.5 billion value-added tax cuts 17.5 billion rural basic construction 54 billion technological innovation 23 billion education and healthy care 5 billion environmental protection 51.2 billion Tax Cuts for business. Public and private infrastructure improvements. Curb Decline of real auto bailout *Tax Relief
Singapore Canada China
13.6 30 586
8.40% 1.90% 16.23%
Brazil Russia United States Others Total
283.3 5 787 107.6 2742.4
14% 5.69%
References:
1. http://www.economist.com/countries 2. http://www.imf.org/external 3. CIA - The World Fact book 4. Stimulus estimate from www.newyorktimes.com and www.sina.com 5. http://uk.reuters.com/article 6. Greg Mankiw’s blog , http://gregmankiw.blogspot.com 7. S&P Reports on global economy
doc_588683462.doc
It discusses the good and bad of the stimuli.
1 |Page
How Much Is Too Much: Stimulus Package For Global Recovery
madhav_kumar@yahoo .com
2 |Page
Abstract
The world has been in a major financial downturn for over more than a year. It has been a time of a lot of grim news appearing on a daily basis about the poor condition of affairs globally and the depth of an imminent recession. The situation demanded drastic measures and a coordinated global effort to overcome the prevailing circumstances. Most of the major economies, 30 of them, instituted financial restructuring plans and implemented various measures to stimulate the system and put the globe back on the growth trajectory. The stimulus packages have far reaching implications for the countries concerned and for the world as a whole. The present status of global economy is showing early signs of recovery and it is expected that a stable condition would be reached in the next one year. This has raised questions as to whether there is a need for a continued economic stimulus or such measures can be withdrawn now to let the market take charge of the economic scenario. Whether the stimulus ,which drains out taxpayers money needs to be sustained or is the time ripe for an exit strategy is the most important question that needs to be answered in the near future.
3 |Page
Table of Contents
Table of Contents....................................................................................................... 3
4 |Page
Introduction
The year 2008 was one of the most turbulent ever as far as the world economy is concerned. Major corporate behemoths and financial powerhouses, the veritable symbols of modern capitalism, fell down like a pack of cards. In a flat world none of the economies were isolated from the fallouts of this crisis. The world saw one of the toughest times in the form of a global financial crisis and an economic slowdown. With the US and UK economies contracting by 0.6 and 0.5% respectively in the last quarter of the year 2008, the major developed economies of the world were facing major slowdown or recession. Financial crises are not a new phenomenon. The general view is that these crises are a function of mismanaged and malfunctioning markets and hence can be rectified by sensible policy actions like greater regulation, transparency and accountability. A less popular but quite valid school of thought goes ahead to say that financial crises are inevitable and endogenous to the functioning of a normal capitalist economy which allows free rein to the actions of private agents. So a financial crisis can be resolved by policy actions is a well accepted fact. The crisis of this size and complexity was never seen before. A recovery surely required concerted efforts of not only the developed countries but also of the important economies of the new order like India & China. Thus soon after US declared its bailout and stimulus packages most of the world followed suit with all major countries declaring financial packages The total amount declared was of the tune of about 3 trillion dollars. This paper tries to understand the various measures taken by economies across the globe and elaborates on whether such policies need to be continued further or the world economy should now be set to start moving on its own. This question has gained a major importance in the last few weeks as most economies are seeing signs of recovery and are contemplating on whether further action needs to be taken to support the economy.
Fiscal Stimulus : Does it really work and how?
5 |Page
Fiscal stimulus involves a combination of lower tax cuts and higher spending. In theory the tax cuts will increase disposable income and therefore encourage consumer spending, leading to higher aggregate demand and economic growth. Diagram of Increased AD
For example, If the UK government cuts VAT by 2.5%. This means that people will pay £12.4 billion less VAT. That is a pretty substantial tax cuts. But will it increase spending considering the following facts • • • • People might want to save the extra disposable income Falling house prices might outweigh the tax cuts. It takes time for people to respond. Credit crunch is causing sharp fall in lending and normal business activity.
Therefore, consumer spending may continue to fall. However, on the other hand if the UK government implements policies such that the tax cuts are being met with lower interest rates and a depreciating domestic currency, both of these should help increase aggregate demand. So we can say that fiscal policy can help to reduce the extent of a recession. It may not solve the recession straightaway and it may take time, but, it may mean the recession is shorter lived and not as steep. Also, if the inflationary pressures are falling away, the inflation impact of expansionary fiscal policy is not so bad making it advantageous as a measure to ensure speedy recovery.
6 |Page
The Bailout: Stimulus Packages Across The Globe In this paper we will understand in detail the stimulus packages of two countries i.e. USA and India. Soon after the crisis surfaced in its entirety the US government came up with proposed stimulus packages of $825 billion. The declared package was so big that, it could be the gross domestic product of the 19th largest country, just ahead of Australia. The stimulus was wide ranged from money for infrastructure and tax cuts to schools and health-care technology. Let us see the key components’ of this stimulus package: • $550 billion in new spending • $275 billion in tax relief ($1,000 tax cut for families, $500 tax cut for individuals through SS payroll deductions) • $ 90 billion for infrastructure • $ 87 billion Medicaid aid to states • $ 79 billion school districts/public colleges to prevent cutbacks • $ 54 billion to encourage energy production from renewable sources • $ 41 billion for additional school funding • $ 24 billion for "health information technology to prevent medical mistakes, provide better care to patients and introduce cost-saving efficiencies" and "to provide for preventative care and to evaluate the most effective healthcare treatments." • $ 16 billion for science/technology ($10 billion for science facilities, research, and instrumentation; $6 billion to expand broadband to rural areas) • $ 15 billion to increase Pell grants by $500 • $ 6 billion for the "higher education modernization." As can be well understood from the breakup as shown above that the stimulus package as announced by the government of US was very comprehensive. It tried to cover every aspect of the economy and create long term value for the economy and society as a whole.
7 |Page
After Mr. Barrack Obama took over the charge as the president The American Recovery and Reinvestment Act 2009 (ARRA) was passed on 17th February 2009. The measures are nominally worth $787 billion. The Act includes federal tax cuts, expansion of unemployment benefits and other social welfare provisions, and domestic spending in education, health care, and infrastructure, including the energy sector. The Act also includes numerous non-economic recovery related items that were either part of longer-term plans or desired by Congress (e.g. a limitation on executive compensation in federally aided banks). Provisions Of The ARRA Act 2009
To counter the economic downturn and give a boost to the economy, Indian government also announced and implemented comprehensive stimulus plans. The first stimulus package was announced on 06th December 08 by the central banker, RBI. Following are the key features of the first stimulus package: • • Repo rate cut by 100 basis points to 6.5 percent Reverse repo rate cut by 100 basis points to 5 percent
8 |Page
• • • • •
No changes in cash reserve ratio and statutory liquidity ratio Refinance of Rs.7,000 crore (Rs.70 billion/$1.4 billion) for Small Industries Development Bank of India Refinance of Rs.4,000 crore (Rs.40 billion/$800 million) for National Housing Bank Housing loans under Rs.2 million classified under priority sector Exceptional treatment to commercial real estate exposures Restructuring by banks eligible for exceptional regulatory treatment
These measures were basically to step up demand and arrest the growth moderation .Net liquidity since September 2008 was enhanced by Rs.300,000 crore ($60 billion). At this juncture it was also expected that the recession will be deeper and recovery longer than earlier anticipated. As the confidence in global credit markets continued to be low the credit lines remained clogged India's exports declined in October 2008 for first time in seven years. The demand for bank credit was slackening, despite comfortable liquidity. But inflation, was declining and economy virtually was on the verge of a “deflation”. The second leg of stimulus was announced by the Government of India on 2nd January 2009. This package was to assist the measures taken in the first one with a long term development focus. The highlights of this stimulus package are as follows: • Additional plan expenditure up to Rs. 20,000 cr. in the current year mainly for critical rural, infrastructure and social security schemes such as Pradhan Mantri Gram Sadak Yojana , Jawaharlal Nehru National Urban Renewal Mission etc. • • • • Across-the-board cut of 4% in ad-valorem Cenvat rate except for petroleum products Several other measures to support exports, housing, Micro, Small & Medium Enterprises and textile sectors Authorizing IIFCL to raise Rs. 10,000 cr. to refinance bank lending for infrastructure projects Liberalizing the policy on External Commercial Borrowing (ECB)
9 |Page
• •
In order to give a boost to the corporate bond market, FII investment limit in rupee denominated corporate bonds in India would be increased from US $ 6 bn to US $ 15 bn States will be allowed to raise in the current financial year additional market borrowings of 0.5% of their Gross State Domestic Product (GSDP), amounting to about Rs 30,000 crore, for capital expenditures.
The measures outlined above taken together with steps taken earlier constituted a substantial counter-cyclical stimulus in the current year. The Government was well aware that the measures required to provide an economic stimulus to the economy had to extend beyond the financial year 08- 09. In February 2009 Finance minister Pranab Mukherjee announced the third leg of stimulus package. The package cut excise duty and service tax two percentage points each. Service tax has been cut across the board from 12 per cent to 10 per cent and the excise has been reduced by the same margin only for items that currently attract the 10 per cent rate. Most other major economies took drastic measures to reduce the effects of the downturn. A comparison of the measures taken by the countries has been given in the Appendix 1. Almost all major countries have depended on increased governmental expenditure to provide a thrust to the falling GDP’s and economic health.
Analysis Of The Effects Of Stimulus:
The financial crisis and recession have been a disaster for the US and its labor market. The economy has lost more than 7 million jobs since the recession began. The revival of the labor market is expected to be central to economic recovery. As shown in the diagram below the
10 | P a g e
situation of employment does not reflect an early recovery and as far as the US job market is concerned the figures are much worse than was expected after the stimulus package. However the actual effects would still need some more time to surface and only then it would be clear whether the stimulus was able to address the problems of unemployment.
The U.S. trade deficit narrowed in August as exports posted a small gain, while imports fell on a big drop in demand for foreign oil. The continued rise in exports may be viewed as an encouraging sign that the global economy is starting to recover from a severe recession. But the deficit is expected to rise in coming months on the back of a rebounding U.S. economy, which will start importing more foreign products. But that impact will be dampened somewhat by rising exports as American manufacturers benefit from a revival in the global economy. The result of the latest Wall Street Journal survey with 48 economists speculates that US economy will witness 3.1 % growth in Gross Domestic Product starting from the third quarter of this year. The economists also predict that chances are less that unemployment will be below 6% from the current 9.8%. So the example of US suggests that though the package has somewhat improved the condition and has provided stability to an economy in tatters the time is still not ripe to let the market take control.
11 | P a g e
As far as the Indian economy is concerned it has seen steady expansion in domestic demand while savings and investment rates have picked up. The series of fiscal and monetary steps have helped revive demand. Early signs of revival of the Indian economy are visible though failed monsoons have cast a shadow on agricultural growth. The economy is expected to grow by about 6.5-6.7 % despite the poor monsoons. The figures of industrial index of production released in September for July showed 6.8 per cent growth in factory output. Reflections of an economic revival can also be seen in the current capital market rally. But these preliminary indications do not completely reflect a revival and there is need to be very cautious in every measure taken, as an adverse policy can result in a deeper slump.Indian policy makers need to keep borrowing costs low to aid a nascent economic recovery even as inflation quickens. A dear money policy or credit curbs at this juncture will have an adverse impact on growth So though the stimulus packages have resulted in the economy being virtually back on the growth track, there is still some time before we can expect the withdrawal of stimulus and allowing the market forces to takeover.
Is It All Good : The Adverse Effects of Stimulus
There is growing concerns across the world regarding the adverse effects of a stimulus package. Let us take a look at some of these major issues: • The stimulus measures have resulted in increased national debts. In case of the USA the national debt stands at 11.4 trillion dollars which and is about $ 37,000 per person. Continuing with the stimulus would further increase the debt levels.
12 | P a g e
•
In case of India the fiscal deficit is at a very high level (6.8% Of GDP). Such a high deficit is a major cause of concern and requires an effective stand on when to stop the stimulus
•
One major concern with these huge bailouts is the creation of a “Moral Hazard” scenario. These may affect the companies in terms of poor management, weak leadership by setting up bad precedents for future.
•
Another major concern about the stimulus packages has been the use of taxpayers’ money to revive a problem that has been created by a few, largely greedy and irresponsible firms. This has frequently been quoted as “Privatization of Profits and Nationalization of Losses”.
The Long Term Implications: Though the stimulus package has been majorly for the revival from the economic stagnation and recession, it has also real long term implication for the economies. An important part of all stimulus packages has been in the form of infrastructure spending to accelerate growth. This improved infrastructure is expected to create value much beyond the scope of the package. This is also going to boost foreign investments in the long run in countries like India which are in desperate need of high quality infrastructure. Also the increased spending is expected to create a large number of jobs. This will benefit a large section of unemployed and would boost the consumption demand and disposable income in the long run.
Conclusions: The present signs of revival in the global economy should not be confused with the financial crisis being over and the countries should be ready with policies to sustain the recovery, The countries around the world need to co-ordinate policies to achieve a global rebalancing and sustain the recovery. This view assumes even more significance in the event of G-20 nations
13 | P a g e
agreeing not to withdraw stimulus packages prematurely and coordinate actions among themselves in this regard. The global activity is now on the rise again, however, the world economic growth is expected to be in the negative zone of 1.1 percent in 2009 as per IMF estimates. Growth of global economy is expected to be around 3% by next year as per the estimates. After a deep recession, global economic growth has turned positive, driven by wideranging, co-ordinated public intervention that has supported demand and reduced uncertainty. However, the recovery is expected to be slow, as financial systems remain impaired and support from public policies will gradually have to be withdrawn. But as of the next year or so the stimulus needs to be continued to ensure that these green shoots are actually converted into trees that can weather tough conditions and stand on their own.
Appendix 1 Global Stimulus Measures Country
Japan France Germany (1st) Germany (2nd) Britain
$(USB) %GDP Features
516.3 33 29 67 30 11.70% 1.30% 0.80% 1.80% 1.10% First package total = $278.3 billion, Second package total = $238 billion; $111 billion for tax cuts, More than half of total for capital injections for lenders and financial institutions infrastructure; loans to carmakers infrastructure; tax relief & support for SMEs; education; aid to auto industry; tax relief for households 2.5% cut in VAT; govt. guarantees for loans to SMEs
14 | P a g e
EU-wide
254.6
1.50%
"judicious tax cuts"; public works projects; reductions in interest tax cuts for corporations, subsidizing wages, guaranteed bank loans (gov't to assume 80% risk on private loans), infrastructure spending, cash handouts to low earners, and a 20% personal income rebate of up to $2,000 per worker. Massive investments in infrastructure, tax relief and transfers, and other new initiatives infrustructure 263.7 billion social welfareprojects 41 billion disaster reconstruction 146.5 billion value-added tax cuts 17.5 billion rural basic construction 54 billion technological innovation 23 billion education and healthy care 5 billion environmental protection 51.2 billion Tax Cuts for business. Public and private infrastructure improvements. Curb Decline of real auto bailout *Tax Relief
Singapore Canada China
13.6 30 586
8.40% 1.90% 16.23%
Brazil Russia United States Others Total
283.3 5 787 107.6 2742.4
14% 5.69%
References:
1. http://www.economist.com/countries 2. http://www.imf.org/external 3. CIA - The World Fact book 4. Stimulus estimate from www.newyorktimes.com and www.sina.com 5. http://uk.reuters.com/article 6. Greg Mankiw’s blog , http://gregmankiw.blogspot.com 7. S&P Reports on global economy
doc_588683462.doc