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Fiscal stimulus, Obama and Pranab way February 17, 2009

Posted by nsworld in Business and Economy.

Though not in all respects but at least in some, Obama and Pranab Mukharjee have things in common when it comes to duty on hand and the expectation of the wider public per se.


Obama is facing the daunting task of injecting life saving serum to the mighty economic superpower which is threatening to go to sleep. Pranab has also two major responsibilities, one same on the lines of Obama, though not of same magnitude and another to sow the seeds of `feel good` factor before the general elections.


And here comes the `Stimulus package` from both the sides. Obama has unveiled the whopping, one of the largest spending ever by government, stimulus package which is almost close to $1 trillion. And out of this almost 70% will be in the form of government spending and the remaining will take the form of tax relief.


As US being a spending driven economy the trickle down effect of this one trillion dollar(which is almost equal to India`s GDP) stimulus package will bring smile on the faces of many Asian and Emerging economies.


Above argument may be theoretically right. Tax cuts, no problem, will leave more money in the hands of public and make them to spend more and a minor boost to the economy. Proposed government spending, part of the stimulus package coupled with the tax cut, is a humongous amount even to the economy of US size.      Where will Mr. Obama get this money from? If it is borrowing, is it public or any thing else other than this? If government starts borrowing at this scale, what will happen to the Private borrowing? where the private enterprises get money from? Many economists have raised concerns on this aspect and the convincing answer is yet to arrive from the Capitol Hill.


And our own Indian version of the Stimulus package announced by FM Mukharjee, with the constitutional constraints in mind(elections round the corner, ruling regime should not make provisions and promises which could become burden on the future regime), rolls out more funds for the exisisting, Rural Job guarantee scheme, Bharat Nirman Scheme, more Subsidy on farm loans, cheap credit for exporters and major thrust on Infrastructure projects, with a view to bring back the slowing down demand. Finally this fiscal indiscipline has taken the revenue deficit to 4.4% of GDP , against the target of 1%. Again here also, larger borrowings will have cascading effects like increase in interest rates.


On a broader level, both of them have done the same things, in the similar scenario, and both of them have to answer the same question convincingly, and this is not irony.







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