India: All eyes on PM Modi’s stimulus package – 25 Sep 2017

  • When Prime Minister Narendra Modi addresses the two-day Bharatiya Janata Party (BJP) national executive meeting that began on 24 Sep 17, economy is going to be on top of his mind.
  • India’s GDP grew 5.7% y/y during the 2Q17, it was 7.9% y/y in 2Q16. The debate now is what PM Modi should do to pump-prime the economy.
  • There have been reports of the government planning to give the economy a INR 40,000 crore stimulus. When PM Modi addresses close to 1,400 MLAs, 337 MPs and all MLCs besides BJP’s core group leaders from states among others, he is likely to not ignore the elephant in the room.
  • The INR 40,000 crore stimulus can boost exports, encouraging domestic investment, supporting small and medium enterprises and providing more money for rural infrastructure and affordable housing.
  • But the stimulus won’t come without its costs. It can adversely impact macroeconomic stability and may not be wholly desirable when inflation is rising and current account deficit is growing.
  • A major challenge the government faces is that it has very little fiscal space that allows a stimulus. It will have to sacrifice its fiscal deficit target, if it if comes out with a stimulus. The government revenues, especially after GST, are not seen to be too encouraging.
  • Another question before PM Modi could be whether to spend more on government projects or give more money in the hands of people to boost consumption. While spending on projects can have a good impact on creation of jobs and growth, the challenge is the time it would take for that money to be spent on projects.

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