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“Stimulus package not sufficient”

— Photo: M. Vedhan

T.N. Srinivasan speaks to The Hindu in Chennai on Tuesday.

CHENNAI: The provisions in the stimulus packages announced by the Indian government in response to the current economic crisis did not go far enough to solve the problem, T.N. Srinivasan, Samuel C. Park Jr. Professor of Economics at Yale University, said here on Tuesday.

Speaking to journalists at The Hindu office, Dr. Srinivasan said that “slowdown of demand shrinkage” and “direct demand creation” were necessary to tide over the crisis in the short-run. For the long-run, the government should address the moving away from labour-intensive enterprises and focus on creating strong labour and land markets.

“Pushing very much on the supply side asking banks to lend when the demand is not moving ahead — it is not clear how this would work,” Dr. Srinivasan noted, adding the effects of the stimulus package in increasing demand were not clear.

Even sector-specific duty cuts would only help a certain proportion of exporters in the sector and it was not clear how they would affect the entire sector or the whole economy. Talking about increasing investment-led demand, he said public sector investment was required in the creation of infrastructure as the private sector would prefer to shelve its expansion plans and wait for better indications of what the future would hold.

“Unless the private sector sees the current slowdown as an essentially temporary phenomenon and believes that the economy will be bouncing back to 8.5 per cent or more [growth rates], simply reducing the interest rates will not help,” he said.

In the long-run, the government should try and move back India to the higher growth rate path by focussing on the country’s strengths. Labour laws should be modified and a strong labour market should be created, he said. The government should also create a demand for labourers in industries and encourage foreign investment in export-oriented, labour-intensive industries to compete with China, which was strong in them.

Problems with land acquisition could be solved if the country moved to land purchase through market-determined prices. To ensure that this was fair, the land market should be strengthened to enable easier investments in infrastructure.

Strengthening the labour and land markets should be followed by a creation of a strong credit market to stabilise India’s growth prospects in the long-term, Dr. Srinivasan said. The economist also called for a deeper analysis of the financial and real sector linkages under new conditions as the economy had changed significantly over the years.

Unless the long-term development strategy was re-thought, “mousey” stimulus packages would help only so much, he said.

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