Arvind Panagariya’s advice to Modi- Just hold that fiscal stimulus: 5 key takeaways

“Any claims of fundamental weakness in the economy are so far unsupported by data,” says Arvind Panagariya. (Image: FE graphic)

Arvind Panagariya, the former vice chairman of NITI Aayog advises the government against spending a huge amount on any fiscal stimulus, as he believes that the effort taken for fiscal consolidation so far may go down the drain. Further, the expert cautions stakeholders against falling for the trap of going by the “feel” of economic data, and says that one must take into account the actual indicators. In a blog post featured in the Times of India, Arvind Panagariya quotes Johan Norberg, an ace economist, “People are predisposed to think that things are worse than they are, and they overestimate the likelihood of calamity. This is because they rely not on data, but on how easy it is to recall an example. And bad things are more memorable.” In the same blog, Arvind Panagariya expounds on the current state of economy, his take on the numbers and the way forward. Here are five key takeaways-

Corporate Savings is picking up

According to the expert, corporate savings averaged 11.8% of GDP during 2014-15 and 2015-16. Contrasting these figures, the economist points out that between 2003-04 and 2011-12, when the economy grew 8.3% on average, corporate savings averaged a paltry 7.4%. “Indeed, corporate savings during each of 2014-15 and 2015-16 have exceeded those in every single year between 2003-04 and 2011-12 by wide margin,” he observed.

Corporate Investment is rising

Arvind Panagariya says that the corporate investment as a proportion of GDP has actually risen of late. Backing his claim, he points out that corporate investment as a proportion of GDP averaged 12.95% during 2014-15 and 2015-16 and compares with 12.4% on average between 2003-04 and 2011-12. “Thus, any claims that corporate investment was out of line with GDP growth estimates too fail to withstand scrutiny,” he observes.

Economy is strong fundamentally

Even as the latest quarterly GDP growth figure of 5.7% may have come as a rude shock to many economic observers, Arvind Panagariya says, “While the government must be vigilant to the decline in growth rate, as it demonstrably is, it should avoid overreacting to it. Any claims of fundamental weakness in the economy are so far unsupported by data.”

Take on Fiscal Stimulus

Arvind Panagariya writes in the Times of India blog, “The government must especially resist the temptation to go on a spending spree pre-emptively. It has taken three years of determined effort to achieve fiscal consolidation. This achievement cannot be sacrificed without compelling evidence justifying it.”

The actual issue and solution

The expert points out that there are two known sources of weaknesses in the economy: twin balance sheet problem and poor performance of merchandise exports. According to Panagariya, the Reserve Bank of India (RBI) is already tackling the former and the government may consider complementing that effort with accelerated recapitalisation of banks. “That will be money well spent,” he advises.

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