To roll(back) or not!

As the government mulls over the withdrawal of the stimulus package, two things have become clear: One, the package actually worked, since the numbers posted by India Inc. in the last quarter have been impressive, considering the situation of their global counterparts. The GDP growth rate has been above expectations, and the country has weathered the storm pretty well. Second, the economy is beginning to overheat, consequent to all the cheap money and low taxes, causing inflation to spill over onto industrial goods, with price rise reported in cement, metals and auto.

A quick analysis of how the package actually worked reveals that to counter falling exports, we stoked our domestic demand, especially the rural market, and lured the investors and consumers alike to join the party. Consequently, flagging auto sales picked up, realty prices bounced back, and the retail sector looked up again. Now, the consumer sentiment mood has improved, and the economic situation has somewhat reversed. The general opinion is that rates and taxes have been ‘too low for too long’, and it is imperative that the stimulus policies be rolled back now to reign in prices, and provide relief to the aam admi, whose cause the ruling party has championed for long.

The critical question is by how much. Lessons from the 1930s tell us that if the entire stimulus is withdrawn at once, a double dip downturn is likely. The best approach under the circumstances would be to have a gradual withdrawal, with two-three phases of rollback. This will cure the price rise, without causing too much cooling off at once. Mr. FM, let the budget just provide the first of the series of rollbacks.

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