More jobs, cheaper food will stimulate economy

Developing Asia was until recently considered to be relatively immune from the global crisis for several reasons: the significant role of China as a regional economic leader and potential growth pole; the cushion provided by the very large external reserves that had been built up over the past six years by Asian central banks; the fact that most Asian governments had been following prudent if not downright conservative fiscal strategies that have focused on restricting government expenditure rather than raising taxes and consequently have generated very low fiscal deficits or fiscal surpluses.
Despite all this, the crisis has nonetheless operated directly to worsen fiscal balances in most Asian countries. Declining exports and the associated downturn (or deceleration) in economic activity have reduced tax revenues. And the need to bailout companies in distress, or provide tax and other incentives has meant that government expenditure has risen even in the absence of increases in direct public expenditure. The rising and then volatile prices of food and fuel have caused public subsidies to rise in countries in which these prices are even partly controlled.
All this has implied worsening fiscal balances even before any attempt could be made to increase government spending as part of a fiscal stimulus package to counter the crisis. Yet the ability of governments in the region to finance such increasing deficits is, unfortunately, constrained, despite their recent fiscal discipline.
Borrowing from private international sources has been negatively affected by the reversal of international capital flow. Sudden and occasionally unexpected balance of payment deficits have emerged because of the decline or slowdown in current inflows (goods and services exports as well as remittances). Fiscal expansion based on deficit financing has been constrained by the fear of inflation (even in economies where this fear is not warranted because of the existence of substantial unutilised capacity and lack of immediate supply bottlenecks).
It is worth noting at this point that the concept of fiscal space, which is increasingly used as a guide to future fiscal stance, should not be seen as determined by the existing levels of fiscal deficits or public debt. This is because fiscal deficits will be inflationary only if
l they involve an aggregate excess of expenditure over income, which in turn implies that the initial spending will not generate at least equivalent output through a multiplier process; and
l the economy cannot afford to import to make up any supply shortfalls that could hinder the multiplier process, which in turn implies that the country cannot access foreign exchange either through capital inflows or drawing down of reserves.
Only in situations in which both of these conditions are met can it be argued that the government does not have the fiscal space to provide a countercyclical stimulus. It is obvious that the existing level of fiscal deficit tells us very little about either of these conditions, except insofar as large deficits suggest that the limits to non-inflationary spending may be closer.
The evidence is clear that the crisis has involved growing fiscal deficits, or a change from deficit to surplus, in most Asian countries. The exceptions (such as Pakistan) are countries that have been forced to seek International Monetary Fund assistance and consequently have faced policy conditionalities that include reduction of fiscal deficits through stringent budget cuts even in the face of crisis. However, the change in fiscal stance, in terms of a marked increase in deficit to gross domestic product (GDP) ratio or a shift from surplus to deficit, has been evident only in relatively few countries, such as South Korea, Malaysia, the Philippines, Singapore and Vietnam.
In other countries of the region, the fiscal response thus far has been relatively muted, suggesting either that government feel or are constrained in particular ways or that the need for countercyclical macroeconomic measures is less keenly felt in these countries. Even in China, the country that has the biggest fiscal stimulus in terms of absolute value, the change has only been from a fiscal deficit of 0.4 per cent of GDP in 2008 to a projected deficit of 4.1 per cent of GDP in the current year.
A large part of that consists of actual spending by the government, rather than tax concessions, bailouts and other sops to the private sector. The infrastructure spending, which is part of the fiscal stimulus in China, is directed more towards the central and western regions, which were hitherto relatively deprived, and this is likely to rectify the regional imbalances that grew during the recent boom.
The other spending, especially on health and related areas, will not only improve conditions of life but also lead directly to more employment.
In India, of course, the fiscal deficit is already rather high relative to other countries in the region, with a projected deficit of around six per cent of GDP in the current fiscal year. But this does not mark an increase from the previous year, and a large part of it is because of tax and other concessions given to corporates. This is much less likely, than direct public spending, to have a positive impact on economic activity and employment or on general conditions of life of the people. There is a case for significantly increased public spending in the areas that matter: the employment guarantee, provision of affordable food for all, and education. It would be a great tragedy if the countercyclical measures that are still imperative for India are not designed to do this.