NAME:-

PRAMIT CHHETRI

ADDRESS:-

IFIM Business School (Opp. Infosys Campus Gate # 4) # 8P & 9P, KIADB Industrial Area Electronics City 1st Phase Bangalore 560100

CONTACT NO.:-

09611997127

Email ID:-

pramitchettri362@gmail.com

FISCAL STIMULUS BOON OR A BANE

One of the major macroeconomic policy adopted by the Government to achieve certain economic goals such as economic growth, employment, income equality, and stabilization of the economy on a growth path is fiscal policy. Fiscal policy through its various instruments such as budgetary policy, Government expenditure, taxation and public borrowings has driven the economy towards its growth and prosperity. Though there are evidence when fiscal stimulus had lead the economy into the path of prosperity its not always so, as it has been rightly said achieving economic goals through fiscal policy is like shooting through dense fog at an erratically moving target with an inaccurate gunBaumol,William J. and Blinder,Alan S, Economics: Principles and Policy. Fiscal policy are in many cases futile for an economy and leads to a fuzzy growth of an economy. To support my statement I would like to recall the stimulus package of 2009 i.e $862 billion which Americans had adopted in the form of (ARRA) American Recovery And Reinvestment Act of 2009 authorized to be spent to bolster sagging domestic demand, however the finding was that only 2 percent of what was sanctioned got spent it means though the state and local governments received fairly large sums of money they werent able to spend it and nor did the purchase of goods and services increased instead they reduced borrowing and increased transfer payments, this explains that the fiscal stimulus had no material effect on the growth of GDP, and this was not only with America even India and many other economy had faced the same problem. In a economy like India, Brazil and other developing economy the Government spends a lot of money in the form of Government Expenditure which includes total public spending on purchase of goods and services, payment of wages and salaries to public servants, public investment, infrastructure development, transfer payments which is an injection into the economy to add to the aggregate demand and to contribute to the GDP, and to meet this expenses the Government has to depend on the public revenue which comes in the form of taxation both direct and indirect tax, but in such developing economy the majority of people has low level of incomes, small proportion of population in taxable income groups , existence of a large non monetized sector and all pervasive corruption and inefficiency in administration, especially in

tax collection machinery all of which creates a huge gab in the public expenses and the revenue leading to a huge fiscal deficit, so in order to meet this fiscal or budget deficit the Government indulges into public borrowings both internal and external such as borrowings from Central Banks , Foreign Governments , International organizations like World Bank, IMF and market borrowings which further adds on to the deficit financing and leads an economy towards a debt trap. Deficit financing beyond the absorption capacity of the economy accelerates the pace of inflation. Inflation than creates other kinds of economic problems and also this kind of government expenditure based on deficit financing is alleged to crowd out the private investment it means that deficit financing results in net injection into the economy. This results in an increase in aggregate demand and therefore rise in the general price level. More so, when government increases its spending on remote return projects like economic and social infrastructural projects such as construction of irrigation canals, roads, railways, hospitals . Deficit spending increase in money incomes this sets an inflationary trend in the economy. To control inflation, the central bank intervention becomes inevitable as its happening currently in India. The central bank will have to offset the expansionary effects of the government spending. In order to control inflation, the central bank adopts a tight money polcy as RBI was doing in India in 2008. In effect, it tightens the credit availability and raises the interest rate. Rise in interest rate chokes off or crowds out the private investment. If in case the deficit spending is financed by market borrowings, crowding out effect occurs even without central bank intervention by its tight money policy. When government spending is financed through market borrowings through the sale of government bonds, bond prices go down and interest rate goes up. The rise in the interest rate cause decline in all the interest-sensitive private investment. Besides, when household decide to invest in government bonds, their investment in real estate, like land, building etc, decreases and also their expenditure on domestic goods and service decreases over time which results in withdrawals or leakages to the circular flow of income and expenditure resulting in decrease of the circular flow of income of expenditure declining the GDP, overall growth, employment and prosperity of an economy. Fiscal policy though had proved to be beneficial for some economy it had really been dreadful for certain economy and also has proved to be an ineffective macroeconomic policy for attaining the economic growth and stabilization and had brought lot of hazards such as inflation, unemployment and economic instability in the economy.