Stimulus, Recovery and Exit Policy: G-20 Experience and India’s Strategy
Publication dateJan, 2010
DetailsReport submitted to the Ministry of Finance, Government of India
AuthorsSudipto Mundle, M. Govinda Rao, N. R. Bhanumurthy
This study was undertaken for the Ministry of Finance as a background paper for the Seoul Summit of G-20. It analyzed the impact of the 2008 financial crisis in different G-20 countries, the stimulus packages introduced, and the recovery processes. The study found that there were substantial variations among G-20 countries in terms of decline in economic growth, the size of fiscal and monetary stimuli, as well as response lags. The study noted that there could be similar variations in reversal of policy stimulus measures depending on each country’s domestic economic environment. Although G-20 co-ordination is crucial for global recovery from the crisis, this does not imply simultaneous stimulus withdrawal. Indeed, such simultaneous stimulus withdrawal across all G-20 countries risks a negative global shock leading to another great recession. Conversely, postponing stimulus withdrawal in overheating economies can lead to high inflation. In the case of India, robust growth recovery has been accompanied by high, unsustainable inflation and a high fiscal deficit. Hence, the study argues for immediate withdrawal of the stimulus package. However, it also points out how this has to be nuanced, keeping in view the objectives of high growth and inclusiveness.