Timing of second fiscal stimulus round crucial

As the famous saying goes, there’s “such a thing as being too late” and the government must sit up and take note. While developed countries, despite plonking down trillions in fiscal stimulus, are readying another round, India’s response has been less than desired and very little is heard about Stimulus-2. 

This, just when multi-lateral agencies have sounded the bugle about a double-dip recession. Last week, the UN Conference on Trade and Development (UNCTAD) in its Trade and Development Report 2020 cautioned that India may see a growth recovery in 2021 alright, but the contraction this year will likely translate into a permanent income loss.

That’s worrying because the later the revival efforts come in, the sharper the income losses could be. The report also warned that there would be no full recovery even if governments continued with current stimulus policies. “Forecasters’ talk of a V-shaped recovery can easily mislead. Such a recovery would require double-digit global growth next year, which is out of the question,” it noted.

The extent of contraction in India is deepening with analysts revising forecasts upwards—to levels unseen in Indian history—and it remains to be seen if the timing of Stimulus-2 will be a drag on the economy instead of aiding recovery.

A double-dip recession is when recovery begins but fizzles out, leading to contraction. The UN says the global economy will likely begin recovery next year, but fizzle out and contract again in 2022. This year, notwithstanding the over $7 trillion spent by countries, the global economy is expected to contract by an estimated 4.3 per cent. In other words, about $6 trillion worth of output will be wiped out, which is equivalent to the size of the Brazilian, Indian and Mexican economies together. 

“In short, the world is grappling with the equivalent of a complete wipeout of the Brazilian, Indian and Mexican economies. And as domestic activity contracts, so goes the international economy; trade will shrink by around one-fifth this year, foreign direct investment flows by up to 40% and remittances will drop over $100 billion,” UNCTAD said. It added that wrong policy steps, ignoring the experience of the global financial crisis, could trigger further shocks which could not only derail recovery but usher in a lost decade. “The greatest... damage will be in the developing world, where levels of informality are high, commodities and tourism, major sources of foreign exchange, and fiscal space has been squeezed under a mountain of debt,” it warned.