Demand for New Fiscal Stimulus

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  • GS-3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment. 

Demand for New Fiscal Stimulus

Context: Confederation of Indian Industry (CII) has urged the government should spend an additional Rs 3 lakh crore as fresh fiscal stimulus to boost demand in the economy. 

It has also suggested where this money should be spent:

  • Provide direct cash transfers to families with Jan Dhan bank accounts,
  • To increase MGNREGA allocation and provide more job guarantees in rural India,
  • To cut the Goods and Services Tax rates, and thus boosting demand,
  • To extend the Atmanirbhar Bharat Rozgar Yojana, under which the government subsidises the provident fund contributions by employees as well as employers for two years

Why the repeated calls for fresh stimulus?

  • The economic recovery is on the cards but in the absence of a fresh stimulus from the government the recovery could be quite slow.
  • In the wake of second wave, firms reported infections among staff or their family leading to disruption in their business cycles.
  • There is also concern about people losing jobs in the aftermath of the second Covid wave and how this loss of livelihood and income could be bringing down the overall demand.
  • In sum, both production (or supply) and consumption (or demand) of goods and services are likely to be depressed in the coming period unless the government transfers money, one way or another, into the hands of the people.

Where will the additional Rs 3 lakh crore come from?

  • The government’s finances are already quite stretched. Fiscal deficit is already more than twice the norms set by FRBM Act.
  • CII suggested that the government should ask the RBI to “expand its balance-sheet in order to accommodate the increased stimulus”. In other words, it wants RBI to print Rs 3 lakh crore worth of new cash and give it to the government to spend.
  • This printing of additional money is requested so that lending costs remain contained. 
    • If government borrows money from market to fund the stimulus, then the resulting competition for money will rise the interest rates in the market, which is not preferred by Private sector looking for economic rebound.

Concerns with printing money

  • Printing money can lead to inflation. India already has high inflation and, as such, this suggestion is problematic. 
  • Also, inflation hits the poor the hardest.
  • Printing money can push governments to spend irresponsibly leading to poor fiscal situation & inefficient usage of money.

Are there any alternatives to printing more money?

There are several alternatives.

  1. Compressing “pay ratios” in the corporate world
  • The pay ratio of a firm (Ex: 5) is the ratio of the salary of the top-paid manager (Rs 25 lakhs) in the firm to the median salary (Rs 5 Lakhs) in the firm.
  • Compressing Pay-ratio will put more money in the hands of workers thus increasing their purchasing powers & boosting demand.
  • However, this measure is for the companies to decide and the government cannot do anything.
  1. Wealth tax
  • The total net worth of private individuals in India in 2018 was Rs 570 lakh crore
  • Of this amount, the top 1% owns 58% or around Rs 330 lakh crore. 
  • A 2% tax on the wealth of just the top 1% would fetch Rs 6.6 lakh crore.
  1. Inheritance Tax
  • If we assume that every year 5% of the total wealth of this top startup gets transferred to their children, or other legatees, as inheritance, then even a modest taxation of one-third of such inheritance would fetch Rs 5.5 lakh crore

Connecting the dots:

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