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Stimulus to industry creates moral hazard: CEA

Stimulus to industry creates moral hazard: CEA

NEW DELHI: Skeptical about the efficacy of a bailout package to Indian industry, chief economic adviser K V Subramanian on Thursday said any such step will be a “moral hazard” and an “anathema” to the market economy.

The remarks come amid demand by India Inc for stimulus package to deal with the slowdown in various sectors of the economy.

“Since 1991 we are a market economy, and in a market economy there are sectors which go on sunrise and then go through sunset phase,” he said at an event here.

“If we basically expect the government to use taxpayers’ money to intervene every time when there are some ‘sunsets,’ then I think you introduce possible moral hazards from ‘too big to fail’ and as well as the possibility of a situation where profits are private and losses are socialised which is basically an anathema to way the market economy functions,” he said.

Echoing similar views, power secretary Subhash Chandra Garg said the reduction in interest rate and availability of credit to private sector are better tools rather than providing fiscal stimulus which crowds out money from the market.

Garg, who was the finance secretary till last month, said the first quarter growth numbers are likely to be lower than the same quarter last fiscal due to general elections impact on the economic activity.

Sensex plunges 587 points as stimulus hopes dim, Nifty ends below 10,750

Stock Market Today: Equity indices fell sharply on Thursday with the benchmark BSE sensex plunging over 550 points amid heavy global sell-off as investors remained concerned over global economic slowdown. The 30-share index nosedived 587.44 points or 1.59 per cent to end at 36,472.93. While, the broader NSE Nifty moved 182.30 points or 1.67 per cent lower to settle at 10,736.40.

The first quarter number is likely to come on August 31. It might come around 5.5 to 6 per cent. People might treat it as an another evidence of a big slowdown. Actually it is not, he said.

“I think the sentiment will change, we need to take a very careful decision. Is the fiscal stimulus based on additional borrowing in the market and cutting down the excess to the private sector of the fund?… We have a problem with the rate mechanism.

“If we further borrow, the rate transmission will not take place efficiently. What works better is faster transmission of rate reduction and availability of credit to private sector is a better way rather than a stimulus,” Garg said.

On improving private investment in the country Garg said there is a need to get into specific sectors.

“Investment is going to be key to the growth… Besides broader macro issues, labour and land, I think, we need to get into very specific sectors.

“… let me illustrate with an example, we have a lot of coal in the country. Our annual target is 1,000 million tonne, but we produce 600 million tonne. We import a lot of coal today. What is required to be done is to ensure that we produce 1,100 million tonne,” Garg said.

Noting that increasing coal production would require a lot of investments, he opined that it would not come until Coal India has the monopoly.
“Probably what needs do be done in my judgement is to award 100 million tonne annual mining capacity to five big companies. This is the way. Now we have a law… all that is required in the sector is to make sure that we award,” he said.
This is the kind of reform that is required to promote investment in specific sectors, he added.
Subramanian too said that the second generation reforms, including pushing disinvestment and labour laws, would help promote investment in the country.

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