THE SEASON OF STIMULUS COMING CALLING!

A well-to-do father decides to prop up his son who has just graduated by setting up an office for him and creating a status for him in the society. The son gets all that he wants on a platter so never really values anything which the father does. So after a few years, all the money spent by the father is squandered off and the business fails.

Well, the father being the father he is decides to go through the process all over again. Thus throughout his lifetime he keeps propping up his son, hoping that one day or the other he will become a responsible son. The basic fault here – the father did everything possible in terms of money and material comfort to ensure that the son is raised well but what he forgot to instill was a sense of value, morals and all such characteristics which today are considered old fashioned. So when there are basic structural issues in the son, no amount of money and “propping up” would have helped.

That’s how we see the current situation of stimulus. You look everywhere around you, there is talk of Govt “propping up” the sagging economy.

The Chinese industrial output has sagged to a 17-year low and the talk has now grown louder of the stimulus package getting doubled. The German economy shrank in the second quarter and pressure is piling on Angela Markel to unleash a fiscal stimulus package. ECB’s Mario Draghi is expected to announce a stimulus package in September to prop up the Eurozone.

On the Indian front too, since yesterday, the voice of Govt announcing a stimulus package has gone up. The news is that the Govt might soon boost the industrial growth with fiscal measures ranging from tax cuts, subsidies and other incentives. The aim of the stimulus would be to bring down the cost of the industry and give impetus to Govt’s pet peeve – ease of doing business.

We saw the Govt’s stimulus packages coming in abundance in 2008 and now after a decade, we are probably going to see the cycle turn around, all over again. This makes us wonder whether stimulus too runs on a 10-year old cycle?

But more than anything else, when there is this growing voice world over for stimulus, we cannot help but wonder, like the father in the story narrated at the beginning – where are we going wrong that constant propping up is required? Like the son, aren’t we essentially saying that the economy is struggling with structural issues and we are trying to correct that with more easy money. In Europe, we are talking about negative interest rates and despite money being so cheap, why no one is interested in creating jobs and setting new industries?

See, the problem with easy money is that the proportion of employment or new investments that it creates is far less than the scams which start tumbling out, say five to six years on. For eg: the Govt to stimulate start-ups in the small scale sector allowed banks to give loans upto Rs.5 lakhs without any collateral. Today, this “5 lakh loan” has become the largest NPA for many banks.

The point is that stimulus is great as the economy needs a booster but the question is why do these boosters come outside the Budget or over and above the Budget? We need to concentrate on why no new investments are happening. The money eased through a stimulus should not find its way back into the stock market or else, by 2029, we would need another hefty stimulus.

Like the way we are habituated to the RBI being asked to prop-up the economy with a rate cut, the world is getting used to a stimulus package every 10 years.