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Wednesday, 06 May, 2020, 12 : 45 PM [IST]

Be realistic on stimulus package; there is no free lunch: CEA

Chief Economic Adviser KV Subramanian said India’s gross domestic product (GDP) will contract in the first quarter, but is likely to grow 2% for the full financial year and that a stimulus is expected “soon”. But he cautioned against demands for government support similar to that provided by other nations as the cost would be too high, reports Gaurav Norohona in ET.

“One of the first things that anybody learns in economics is that there is no free lunch,” he told ET in an interview. “If you are going to monetise (the deficit), that will have some impact on macro fundamentals… We cannot pretend to do policy as if there are no costs.”

Comparisons with stimulus packages in other countries were invalid, he said. He drew parallels with the Spanish flu pandemic of 1918, suggesting a sharp revival.
“From an epidemiological perspective and from the magnitude of the pandemic, the Spanish flu is a reasonable proxy to use... and because there was a V-shaped recovery, I think it is reasonable to say that we can expect the same,” Subramanian said.

Most independent experts expect the economy to shrink in the current fiscal year after the second extension of the lockdown to May 17. Ratings agency ICRA said the economy could contract 1-2% in FY21.

Subramanian agreed there would be a decline in the first quarter, but expects a strong bounce-back in the second half of the fiscal.
“Q1 there will be a decline, Q2 I think should be better than Q1, given that we are opening up the lockdown gradually. Q3 and Q4 there should be acceleration,” Subramanian said. “So overall, I think we may end up with about 2% in real terms. But this is all with the real caveats that an uncertain episode like this demands.”

Given the nature of the Covid-19 pandemic, there’s very little knowledge about the disease and therefore about its impact.

“The global financial crisis was a period of uncertainty, but that was all a completely economic phenomenon, so one could make estimations,” he said. “There is a lot of uncertainty, unknowns that we are dealing with.”

He warned against calls for stimulus measures as large as 10% of GDP, or INR 20 lakh crore, and funding of that through monetisation or printing money. (Source: Economic Times)

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