What, when ,why and how of the Stimulus?

 "Negotiations over a shrinking pie are especially difficult, because they require an allocation of losses"

The above is from Daniel Kahnemann's magnum opus "Thinking, Fast and Slow". India is facing a shrinking pie situation with steep GDP contraction. Fiscal stimulus is imperative and it is expected on a yesterday war footing. Early birds and head-starts enhance hope and confidence which feed favourably into demand and investment.They also act as countercyclical to shrinking pie despondency. Credit boost is a temporary remedy to manufacturing machinery to kick start and keep up the production capacity. But it can work only up to a point, where the productivity and earnings should become sufficient to keep up with the plan of repayment of loans and borrowings. If the people in general do not foresee sufficient future income and employment, they may not turn out to buy things and assets.They cannot evergreen their loans like some corporates feeding only on liquidity. People should have sufficient disposable discretionary income to buy durables and assets. Or atleast have the confidence of generating future income through gainful employment or business opportunities. Otherwise it becomes a shrinking pie syndrome which feeds into further shrinkage,  leading to a vicious cycle.

For quick results, Govt should look at products that have price elasticity. One of the products which is highly price sensitive is Automobile. Irrespective of the clamour of the opposition that cars are bought by the rick, Govt should look at the huge multiplier effect this will have on the rest of the economy. UPA Govt used this carrot when the economy plunged into an economic abyss following the financial crisis in 2008-09 and the growth revival was tough. UPA Govt responded by temporarily reducing Excise duty on Cars etc. in order to boost their demand.This action had a huge beneficial ripple and multiplier effects running across the economy.

However much you tweek monetary policy to boost credit offtake, unless it is followed up by fiscal measures to give a fillip to the demand generation, the credit growth will not be sustained. Fiscal measures must also be credible in the eyes of the public and for that products which have demonstrated price elasticity must be chosen. Only this can start rotating the wheels of the economy bringing about a virtuous cycle of employment,income and surplus.

Of course ,Govt has also taken measures under Atmanirbhar Bharat to promote Make in India to crank up the economy and the demand. But quick result areas and the low hanging fruits must be tried immediately.Govt must always remember:

 "For want of a nail the shoe was lost.

For want of a shoe, the horse was lost.

For want of a horse , the rider was lost.
For want of a rider, the message was lost.
For want of a message ,the battle was lost.
For want of a battle, the kingdom was lost.
And all for the want of a horseshoe nail."

A stitch in time saves nine . The falling tax revenues and the 15th Finance Commission's Chairman Mr.N.K.Singh's exhortation to pep up the GDP growth is a clarion call that can be ignored by Govt only at its own peril.

RBI consumer confidence survey of May 2020 and getting the common man's dreams back.

RBI consumer confidence survey was done in May 2020, which came out a few days back paints a dark picture of consumer confidence. It has hit rock bottom so far.link. Whether it will hit another bottom is a moot point.

According to RBI Consumer confidence collapsed in May with the Current Situation Index (CSI) touching a historic low of 63.7 dipping from 85.6 in March 20. One year ahead Future Expectations Index entered the zone of pessimism at 97.9 for the first time after Modi govt. took charge, falling from 115.2 just two months ago.

These are all negative news, but as expected. However these are lag news and therefore markets looking for lead indicators ignored this. We all now know that Covid 19 has wreaked havoc on our economic health more than what it could do to people health.

But there are several silver linings like not many people do not expect price levels to go up. If we discount the "recency bias" in their opinions and perceptions,I still find 14.4 % people saying in May 2020 that the economy has improved. We must also keep the date of survey and context in our minds. The survey date is between  May 5-17 and in the midst of Covid fear, with lakhs of migrant workers walking and shown endlessly 24x7 in TV news. Sometimes I wondered how come with so many trains and buses being stopped which were all running overcrowded, people are managing commuting and travelling. Our media has put a little spin and exaggeration to this by labelling every traveller on foot a migrant labourer leaving for his native place. Every reporter worth his salt with a mike on hand interviewed every single person on foot asking whether he was migrant labour and everyone being asked acknowledging it. Now I understand that all those trains and buses running daily are only for migrant labourers!! That is beside the point.

Coming back to my point that almost 14.4% of people still finding that the economy has improved is a testimony to the confidence of the people on the Govt. Govt has rightly acted with alacrity by announcing Rs.21 lac crore bundled package which will make  supply-side fire on all cylinders. All of us agree that it is the supply side which needs time to pick and put all its pieces together. But the confidence and speed with which Supply-side can get back on its feet, essentially depends on its perception of demand perking up. The demographic dividend is a major contributor to the demand but Future Expectations Index indicator is a proxy for this perception by the Supply-side. When FEI is weak, it is time for the Govt. to understand that income levels are falling and people are losing faith in the strength of the economy. This pessimism will damage the Supply-side booster shots going waste unless the perception is reversed quickly. Opening up of the economy after lockdown will itself augur optimism but sustaining it depends on Demand-side actions by the Govt. To kickstart a flagging economy, the man on the street who is the ultimate consumer must get his job back, his income back and basically his dreams about the future back.

Govt must work for getting his dreams back without losing time. Cut  Auto sector GST, for a start.