Last week, Adi Godrej told the government needs to give more stimulus to the economy—which corporate India has been requesting for a while now. Mint investigates whether the Centre is in a fiscal position to do accordingly and, if not, what the outcome of an economic stimulus will be.

The theory of an economic stimulus

At the time of economic slowdown, as India is experiencing, corporate and customers tend to decrease spending. Individuals are devoid of enough confidence in their financial future and corporate don’t see adequate demand that would give good reason for spending and expansion. Some corporate have lots of debt and are not able to take on extra debt and develop. This slows down expansion. In this situation, the government has to intervene as the financier of last resort and slacken its purse strings to prevent growth from slowing more—or so the theory goes. Therefore, they say, there is no free lunch.

Can the government enhance spending now?

The government requires additional money to spend more than it has planned to invest. But, it is failing to earn sufficient tax revenue—at least, nowhere close to what it anticipated to when the budget for FY20 was presented. The gross tax revenue between April and August has risen only 4.2 percent. If the expenses budgeted by the government for needs to be met, the gross tax revenue should rise by 18.3 percent. Obviously, increase in tax revenue has slowed severely. This is not found more anywhere except the collection of goods and services tax (GST), which has distorted.

The amount of GST collection in September

The government earned 91,916 crore through the GST for the month of September. These collections were the least in 19 months. The collection of GST in September was based on the economic activity in August, which saw a striking decline.

The situation of economic activity

According to financial services company Nomura, the recent research report shows that the economic activity in August this year was weaker than the economic activity occurred at the time of the global financial crisis in late 2008. This recommends that gross domestic product (GDP) growth in India during the July-September period will be lower than 5 percent. Additionally, it suggests that even a 6 percent growth of GDP in the current financial year appears complicated. Here the question arises that where would we go from here.

Will the government need to spend more to increase growth?

The total government expenditure in FY18 and FY19 went up by 15 percent and 9.3 percent (balanced for inflation), respectively, at a time the economy was rising by 7.2 percent and 6.8 percent, respectively. From Q1 FY20, the economy increased by 5 percent—private use expenditure went up just 3.1 percent and government spending grew 8.9 percent. For the last few years, the jump in government expenditure has kept growth going. The interest rates will be pushed up with the increase in expenditure.