World - China;A gigantic stimulus

The huge economic stimulus plan announced by China on Sunday is noteworthy for its scope and timing. By earmarking $586 billion to be spent mostly on infrastructure in two years, the Chinese government is sending out a strong signal that it will do its utmost to stimulate the domestic economy and neutralise the effects of a global slowdown. It proposes to spend about 14 per cent of the GDP over the two-year period on constructing new railway tracks, subways, and airports a nd in rebuilding communities destroyed by earthquake last May. The announcement that coincided with the meeting of G20 ministers at Brazil has come a week ahead of the high-level Washington summit in which China will have a major part to play. Its pre-emptive fiscal package might well become the model for other countries to follow. It needs to be noted, however, that China has certain strengths that other countries may not have — for instance, its long and successful exposure to central planning and impressive track record in implementing large infrastructure projects. Besides, much of the investment will come from state-owned banks and companies, not from the government directly.

In several countries including India the need for a contra-cyclical fiscal policy to supplement the efforts of central banks, being discussed for quite some time now, has acquired urgency since September, when the global financial crisis started impacting the real economies. Policy makers have realised that there are limits to what monetary policies can do to stabilise the financial markets. Despite massive liquidity injections, bailouts of iconic financial institutions, recapitalisation of banks, and other unconventional steps taken by central banks, the global economic outlook has been worsening. In India, while new fiscal initiatives are yet to come, the government has estimated that $500 billion will be needed for infrastructure development between 2007 and 2012. There are certain well known constraints. For one, a crucial part of the spending will have to be by the private sector, and policies to attract private investment are not in place across all sectors. Moreover, with petroleum and other subsidies taking up a chunk of the funds, fiscal policy has little room for manoeuvre. India’s track record in project implementation, marked by cost and time over-runs, is patchy. More recently, problems with land acquisition have proved intractable. For all that, public spending on infrastructure and such areas as schools, if need be by pruning unnecessary non-plan expenditure, may well be the way forward and seems particularly appropriate at this time.